Economy in U.S. Shrinks for Third Time Since Expansion Began

U.S. GDP Shrank 0.7% in First Quarter

For the third time since the expansion began in June 2009, the U.S. economy suffered a setback.

Gross domestic product shrank at a 0.7 percent annualized rate in the first quarter, revised from a previously reported 0.2 percent gain, according to Commerce Department figures issued Friday in Washington. That’s the weakest reading since frigid winter temperatures derailed growth at the start of 2014.

While bad weather once again probably contributed to last quarter’s slump, other impediments were also at work -- including a swelling trade deficit caused by a strong dollar and plunging investment in oil exploration following the drop in fuel prices. Federal Reserve officials are among those who believe the slowdown will be temporary, helping explain why they are considering raising interest rates later this year.

“The economy slowed in the first quarter but we’ll see an acceleration in the second quarter,” said Michael Gapen, New York-based chief U.S. economist for Barclays Plc. “It keeps the Fed in line for a rate hike in September.”

Other reports Friday showed consumer sentiment fell less than previously estimated this month, while manufacturing in the Chicago region unexpectedly slumped.

Stocks fell, with equities paring their best monthly gains since February. The Standard & Poor’s 500 declined 0.6 percent to 2,107.39 at the close in New York.

Survey Results

The median forecast of 84 economists surveyed by Bloomberg projected GDP would drop at a 0.9 percent rate. Estimates ranged from a decline of 1.2 percent to an increase of 0.2 percent. The economy grew at a 2.2 percent pace from October through December.

Last quarter’s contraction was smaller than the 2.1 percent fall at the start of 2014, when a prolonged patch of bitterly cold temperatures held back the economy. GDP also shrank at a 1.5 percent pace in the first three months of 2011 during the early stages of the recovery from the worst recession since the Great Depression.

Such declines in GDP are rare in economic expansions, pointing to the fragile nature of the current rebound. The economy hasn’t contracted in three different quarters during good times since the 1950s.

The tendency of the first quarter to be persistently weak in recent years has sparked a debate in the economic profession, with the Fed and its regional banks, including San Francisco, jumping into the fray.

GDP Controversy

The various research results indicate first-quarter growth has underperformed the rest of the year by about 1.6 percentage points to 1.7 percentage points on average. To some, that suggests there is a statistical bias at work. The Bureau of Economic Analysis this month said it’ll make changes to try to minimize the issue, and take this into account when reporting annual benchmark revisions in July.

The contrast to gains in earnings is only adding fuel to the controversy. Gross domestic income, which shows the money earned by the people, businesses and government agencies whose purchases go into calculating growth, expanded at a 1.4 percent annualized rate in the first quarter, Friday’s report showed.

GDI is seen by some researchers, including a few at the Fed, as a better gauge of the strength of the economy. While income and GDP should theoretically match, the different methods used in calculating the numbers cause them to diverge occasionally.


“The increase in GDI is pretty consistent with an economy that’s better than the GDP side,” said Aneta Markowska, New York-based chief U.S. economist at Societe Generale, who correctly projected the first-quarter contraction in GDP. “We expect to see a pretty significant bounce-back in the second quarter.”

As part of the benchmark revisions in July, the BEA will issue an additional growth measure taking the average of GDP and GDI.

The revisions to first-quarter GDP issued Friday showed the trade gap widened more than previously estimated, while inventories and consumer spending climbed at a slower pace. That was partly offset by a bigger gain in home building.

While poor weather and merchandise delays due to a labor dispute at West Coast ports were temporary restraints, the damage caused by the plunge in fuel prices and stronger dollar may be longer-lasting.

Trade Gap

A widening trade deficit subtracted 1.9 percentage points from growth, the most since 1985, compared with the previously estimated drag of 1.25 points, according to the Commerce Department’s data.

Business investment on wells and mines slumped at a 48.6 percent annualized rate last quarter, the biggest decrease since 2009.

A regional reading on manufacturing Friday raises concern that those headwinds remain. The Institute for Supply Management-Chicago Inc.’s business barometer fell to 46.2 in May from 52.3 the prior month. Readings lower than 50 indicate contraction.

The Commerce Department’s report showed consumer spending was also a little slower than initially calculated, growing at a 1.8 percent annualized rate compared with an initial estimate of 1.9 percent. That followed a 4.4 percent jump in the fourth quarter.

Revisions to incomes showed wages and salaries rose even more than last reported and the saving rate was the highest since the end of 2012, indicating households can unleash some pent-up demand.

Consumer Sentiment

Consumer confidence firmed at the end of May, another report showed Friday. The University of Michigan’s final sentiment index for the month came in at 90.7 compared with a preliminary reading of 88.6. Still, it marked the weakest reading in six months.

“The index is still quite high,” Richard Curtin, director of the Michigan Survey of Consumers, said on a conference call after the figures were released. During the latter half of the month, “I expected confidence to inch upward and I still think that is likely over the months ahead.”

The economy is poised to pick up this quarter. A Bloomberg survey of economists in May predicted growth will accelerate to a 2.7 percent pace in April through June, with household consumption expanding 3.2 percent.

Job Market

An improving labor market is among reasons consumers may be more willing to spend. Payrolls rebounded in April, as employers added 223,000 jobs after an 85,000 gain in March. The unemployment rate fell to 5.4 percent, the lowest since May 2008. Weekly applications for jobless benefits are hovering just above a 15-year low reached at the end of April.

“The U.S. economy seems well-positioned for continued growth,” Fed Chair Janet Yellen said in a May 22 speech in Providence, Rhode Island. “Households are seeing the benefits of the improving jobs situation.”

If the economy continues to improve as she expects, “it will be appropriate at some point this year” to start raising rates, Yellen said.

The GDP estimate is the second of three for the quarter, with the third release scheduled for June, when more information becomes available.