U.S. economy shrinks for first time since 2011

Keywords Economy

The economy in the U.S. contracted for the first time in three years from January through March as companies added to inventories at a slower pace and curtailed investment.

Gross domestic product fell at a 1-percent annualized rate in the first quarter, a much bigger decline than projected, after a previously reported 0.1-percent gain, the Commerce Department said Thursday. The last time the economy shrank was in the same three months of 2011. The median forecast of economists surveyed by Bloomberg called for a 0.5-percent drop.

A pickup in receipts at retailers, stronger manufacturing and faster job growth indicate the first-quarter setback will prove temporary as pent-up demand is unleashed. Federal Reserve policy makers said at their April meeting that the economy has strengthened after adverse winter weather took its toll.

“The good news is that the first quarter is over, it was a difficult one for the U.S. economy,” said Ryan Sweet, senior economist at Moody’s Analytics Inc. in West Chester, Penn. “I wouldn’t worry too much about the decline, it’s mostly driven by less construction spending and less inventory accumulation. This quarter should be a good one.”

Another report Thursday showed fewer Americans than forecast filed for unemployment benefits last week. Jobless claims dropped by 27,000, to 300,000. The four-week average decreased to the lowest level since August 2007.

Projections of the 79 economists surveyed by Bloomberg for GDP, the value of all goods and services produced, ranged from a decline of 0.9 percent to a gain of 0.7 percent in the first quarter. Today’s estimate was the second of three readings for the quarter, with the final release scheduled for June 25.

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 1.62 percentage points from GDP from January to March, the most since the fourth quarter 2012. Slower inventory accumulation may encourage factories to step up production should demand accelerate.

“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 CEO 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.

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. For all of 2013, the economy expanded 1.9 percent after a 2.8-percent gain in the prior year.

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.

The increase reflected a stronger pace of spending on services, including utilities as colder winter weather prompted Americans to adjust their thermostats, than the previous three months.

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.

Employers added 288,000 workers in April following gains of 203,000 in March and 222,000 in February, according to the Labor Department.

Auto dealerships have also been busier. Cars and light trucks sold in April at a 16 million annualized rate following a 16.3-million rate in March, after dropping as low as 15.2 million in January, according to data from Ward’s Automotive Group.

The report offered a first look at corporate profits. Earnings fell 9.8 percent in the first quarter from the previous three months, and declined 3 percent from the same period last year.

Please enable JavaScript to view this content.

Story Continues Below

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our updated comment policy that will govern how comments are moderated.