U.S. Economy Shrank for First Time Since 2011

Less is more for the U.S. economy, which suffered its first contraction since 2011 last quarter.

Gross domestic product fell at a 1 percent annualized rate, worse than the most pessimistic forecast in a Bloomberg survey of economists, revised Commerce Department figures showed today in Washington. The good news: Much of the decline was due to less inventory building that economists say can’t last. As a result, some are boosting second-quarter growth forecasts, with Morgan Stanley projecting a 4.2 percent gain.

Stockpiles grew at less than half the pace than in the final three months of 2013, lopping 1.6 percentage points off GDP while businesses cut back on investment. Demand picked up entering the second quarter, giving weight to the Federal Reserve’s view that the economy is recovering.

“Inventories are going to be a much smaller drag, and business fixed investment contracted but is probably going to grow in the second quarter,” said Guy Berger, U.S. economist at RBS Securities Inc. in Stamford, Connecticut. What’s more, “the labor market is in good shape and is moving in the right direction,” he said.

Fewer Americans than forecast filed applications for unemployment benefits last week, figures from the Labor Department in Washington showed today. Jobless claims fell by 27,000 to 300,000 in the week ended May 24 and leading up to the Memorial Day holiday.

The median forecast of 50 economists surveyed by Bloomberg called for 318,000 claims. The four-week average declined to the lowest level since August 2007, before the last recession began.

Spring Warm-up

The northern and eastern U.S. experienced above-average snowfall from December through February, keeping Americans closer to home and hampering production as factories had difficulty obtaining materials on time.

“Growth in key indicators such as employment, income, and consumer spending have recently begun to improve from weather-affected levels earlier in the year,” Robert Niblock, the chief executive officer at home-improvement retailer Lowe’s Cos., said on a May 21 earnings call. “Performance has already improved in May, and continued improvement in the macroeconomic landscape and the consumer sentiment” help give the chain a positive outlook in 2014.

Stocks rose for the fifth time in six days, driving the Standard & Poor’s 500 Index to a record. The S&P 500 climbed 0.5 percent to 1,920.03 at the close in New York.

Companies boosted stockpiles by $49 billion in the first quarter, less than the $111.7 billion in the final three months of 2013. Inventories subtracted the most from GDP since the fourth quarter of 2012. Slower inventory accumulation may encourage factories to step up production should demand accelerate.

Demand Outlook

Not all economists are convinced it will. While inventories will be less of a drag or contribute to growth, “the only question mark is final demand, which appears to still be firmly on the slow-growth track,” Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, wrote in a note to clients.

Economists at Morgan Stanley led by Ted Wieseman raised their tracking estimate for second-quarter growth from 3.7 percent. Inventories, they project, will add 1 percentage point to GDP rather than 0.5 percentage point after today’s figures.

Final sales adjusted for inflation, or GDP minus inventories, climbed 0.6 percent in the first quarter, the smallest gain in more than a year.

Growth Outlook

The economy in the second quarter will expand at a 3.5 percent rate, according to the median projection of 72 economists surveyed by Bloomberg from May 2 to May 7. An increase of that magnitude would still leave GDP at an average 1.3 percent in the first six months of the year, less than the average of 2.2 percent in the current expansion that began in mid-2009.

Today’s figures showed business investment dropped at a 1.6 percent annualized rate. Companies reduced their spending on structures at a 7.5 percent pace, the biggest decrease in a year. Outlays for equipment fell 3.1 percent, the most since the third quarter 2012.

Trade was another soft spot in the first quarter. Exports declined at a 6 percent rate and imports rose as trade in goods and services subtracted 0.95 percentage point from GDP, the most since the second quarter 2010.

Consumer purchases, which account for about 70 percent of the economy, increased at a 3.1 percent annualized rate in the first quarter. The gain, which added 2.1 percentage points to GDP, was more than the previous estimate of 3 percent.

Services Spending

The increase reflected a stronger pace of spending on services, including utilities as colder winter weather prompted Americans to adjust their thermostats. Spending for health care picked up as the provisions of the Affordable Care Act went into effect.

Aside from spending on services, consumer demand for goods cooled from the end of 2013, underscoring the importance of faster job and income growth in spurring the economy.

Americans are growing more pessimistic as well, another report showed today. The Bloomberg Consumer Comfort Index fell to 33.3 in the period ended May 25, the lowest since November, from 34.1 the prior week. A measure of personal finances retreated for the third time in four weeks, and a gauge of whether this is a good time to buy goods and services dropped to the lowest point since mid-February.

Today’s report offered a first look at corporate profits. Earnings fell 9.8 percent in the first quarter from the previous three months, the biggest decline since 2008, and declined 3 percent from the same period last year.

Price pressures remained muted. A measure of inflation, which is tied to consumer spending and excludes food and energy, climbed at a 1.2 percent annualized rate compared with 1.3 percent in the prior period. The gain was initially estimated at 1.3 percent. The Fed’s goal is for increases around 2 percent in the long run.

Today’s estimate was the second of three readings for the quarter, with the final release scheduled for June 25.

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