The harsh winter sent a chill through the U.S. economy in the first quarter as slumps in business investment and home construction stalled growth.
Gross domestic product grew at a 0.1 percent annualized rate from January through March, compared with a 2.6 percent gain in the prior quarter, figures from the Commerce Department showed today in Washington. American consumers were a lone bright spot as households spent more to heat their homes and access health care.
The pullback in growth came as snow blanketed much of the eastern half of the country, keeping shoppers from stores, preventing builders from breaking ground and raising costs for companies including United Parcel Service Inc. Another report today showing a surge in regional manufacturing this month adds to data on retail sales, production and employment that signal a rebound is under way as temperatures warm.
“The improvement we saw in the latter part of the first quarter is continuing and the tentative evidence about April is positive,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “We’re entering the second quarter with a much better ramp for growth.” Shapiro is the second-best U.S.-based forecaster of the economy over the past two years, according to data compiled by Bloomberg.
Federal Reserve policy makers today decided to trim the pace of bond purchases as they looked beyond the slowdown in growth. The committee pared monthly asset buying to $45 billion, its fourth straight $10 billion cut, and said further reductions in “measured steps” are likely.
“Growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions,” the Federal Open Market Committee said in a statement following a meeting in Washington. “Household spending appears to be rising more quickly.”
Stocks rose, with the Dow Jones Industrial Average closing at a record. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,883.95 at the close in New York.
The median forecast of 83 economists surveyed by Bloomberg called for a 1.2 percent increase in GDP, the value of all goods and services produced. Projections ranged from unchanged to 2 percent. Today’s estimate is the first of three for the quarter, with the next reading scheduled for May 29, when more data will be available.
Business activity in the Chicago area expanded in April at the fastest pace in six months, another report showed today. The Institute for Supply Management-Chicago Inc.’s business barometer rose to 63, exceeding all forecasts in a Bloomberg survey of economists and the highest since October. A reading greater than 50 signals expansion.
Consumer purchases, which account for about 70 percent of the economy, rose at a 3 percent pace, spurred by utility outlays and spending on health care tied to President Barack Obama’s Affordable Care Act. The gain exceeded the 2 percent median forecast in the Bloomberg survey and followed a 3.3 percent increase in the last three months of 2013.
The wintry weather held back purchases of goods, which climbed at a 0.4 percent pace -- the least in almost two years.
Expenditures on services climbed at a 4.4 percent pace, the biggest gain since the second quarter of 2000. Health care jumped by $43.3 billion at an annualized rate to $1.85 trillion, boosted by the president’s signature law, according to Commerce estimates. The pickup contributed 1.1 percentage points to growth, the most since quarterly records began in 1947.
The government said its data are still preliminary. The figures are based on estimates until more comprehensive information becomes available in June with the release of the first-quarter survey on services. That makes the latest figures susceptible to revisions.
While retail sales dropped in January amid the winter chill, a March bounce back partly offset the weak start. With winter ending, auto dealerships became busier as Americans took advantage of incentives. Cars and light trucks sold in March at a 16.3 million annualized rate, the fastest since May 2007, following a 15.3 million pace the prior month, according to data from Ward’s Automotive Group.
Burger King Worldwide Inc., the Miami-based fast food chain, was also among businesses to see a weather-induced slowdown reverse.
January and February’s cold and snow “negatively impacted our traffic,” Daniel Schwartz, chief executive officer, said in an April 25 earnings call. “As this weather subsided later in March, we saw one of our highest months in restaurant sales in recent history.”
Average snow cover in the contiguous U.S. from December through February was the 10th-largest for the period since 1966, according to National Oceanic and Atmospheric Administration data analyzed by the Rutgers Global Snow Lab. The northern and eastern U.S. faced above-average snowfall. Detroit had its snowiest winter on record, and New York, Philadelphia, Chicago and Boston each had one of their 10 worst.
Bad weather pushed up business costs for some companies, reining in output. The inclement conditions weighed on operating profit by $200 million at UPS, the world’s biggest package-shipping company said in a statement.
“Clearly, the first quarter was a challenge,” D. Scott Davis, the chief executive officer, said on an April 24 earnings call. “The rest of 2014 looks quite promising. The economy, although it’s still not robust, it will be better than what we saw last year, both here in the U.S. and globally.”
Acceleration in economic growth going forward will depend on a pickup in consumer activity, which hinges on further labor market progress.
Companies added more workers in April than at any time in the previous five months, signaling further progress in the labor market, a private payrolls report also showed today. The 220,000 increase in employment followed a revised 209,000 gain the prior month that was stronger than initially estimated, according to figures from the Roseland, New Jersey-based ADP Research Institute.
Aside from consumer spending on services, the rest of the economy sputtered. Business investment dropped at a 2.8 percent annualized rate, the weakest result since the fourth quarter of 2009. Part of that reflected a smaller gain in inventories that cut 0.6 percentage point from growth.
Exports declined 7.6 percent, exceeding the decrease in imports and pushing the trade gap up to $414.4 billion from $382.8 billion in the fourth quarter. Trade subtracted another 0.8 percentage point from GDP.
Government expenditures also decreased, led by cuts in federal military outlays and by state and local agencies.
The data also showed price pressures remain muted. A measure of inflation, which is tied to consumer spending, climbed at a 1.4 percent annualized rate compared with 1.1 percent in the prior period. The Fed’s goal is for increases around 2 percent in the long run.
The message on prices was less clear in Europe. Headline annual inflation missed forecasts in rising to 0.7 percent in April from 0.5 percent in March, data from the European Union’s statistics office in Luxembourg showed today. Yet the core rate, which strips out volatile items such as energy, food, alcohol and tobacco, increased in line with estimates to 1 percent, and the price of services climbed at the fastest pace in more than a year.
The conflicting signals come as the European Central Bank considers taking unprecedented steps as soon as next week to avert the risk of deflation.
In the U.S., Fed officials have pledged to keep interest rates near zero until the jobless rate falls further and inflation rises toward 2 percent.
Growth will pick up to 2.7 percent pace for all of 2014 after gaining momentum following the first-quarter slowdown, based on a Bloomberg survey of economists earlier this month.