Economy not quite as bad as thought in first quarter

The U.S. economy contracted in the first three months of the year, just not as much as previously estimated. More recent data show that the weakness was largely temporary, with a rebound in the works for the April-June quarter.

The economy, as measured by the gross domestic product, shrank at a seasonally adjusted annual rate of 0.2 percent from January through March, the Commerce Department said Wednesday. That's better than last month's estimate of a 0.7-percent decrease.

Wednesday's figure is the last of three initial estimates of first-quarter growth. Yet the government will revise the figure yet again on July 30, as part of more comprehensive annual changes. That revision may also include changes to the seasonal adjustments the government uses, which could make the change more dramatic.

Harsh winter weather slowed spending by keeping consumers away from shopping malls and auto dealerships. The trade deficit ballooned, slicing growth by the most since 1985 as exports fell and imports rose.

Yet consumers stepped up their spending in May, and home sales are climbing — signs that the economy is back on track. In addition, many of the headwinds the economy faced in the first quarter — from an increase in the dollar's value to spending cutbacks by oil drillers — are fading.

"Growth should remain near 3 percent in the second half of the year as the dampening effects of a strong dollar and oil industry slump fade," Sal Guatieri, an economist at BMO Capital Markets, said in a note to clients.

Exports were hammered by a sharp rise in the dollar's value, which makes U.S. goods more expensive overseas. The dollar has increased 15 percent in the past year compared with a basket of overseas currencies.

That also makes imports cheaper and better able to compete with U.S.-made goods. Imports increased 7.1 percent in the first quarter, while exports fell 5.9 percent. That widened the trade gap, cutting nearly 1.9 percentage points from growth, the most in 30 years.

A trade dispute at West Coast ports also contributed to the disparity, but it has since been resolved. And the dollar's value has leveled off since March, suggesting its impact will lessen.

Oil and gas companies, meanwhile, sharply cut back on drilling and exploration activity and spent much less on steel pipe and other equipment. Business investment in structures, which include oil wells, dropped by nearly 19 percent, the most in four years. Those cutbacks occurred in the wake of last year's steep drop in oil prices, but have since slowed and should stop lowering growth in the second half of the year, analysts forecast.

Americans saved more in the first quarter, aided by lower gas prices and greater hiring. The saving rate rose to 5.4 percent from 4.7 percent in the fourth quarter, the highest in more than two years. Consumer spending growth slipped to just 2.1 percent, down from 4.4 percent in the final three months of last year.

But since then, there have been signs that Americans are opening their wallets again. That should provide a crucial boost to growth in the second quarter and the rest of the year. Consumer spending accounts for 70 percent of economic activity.

"The slowing in consumer spending looks more like a pause that refreshes … rather than the start of a weakening trend," Guatieri said.

Sales at retail stores and restaurants jumped 1.2 percent in May, as shoppers spent more on clothes, building materials and furniture.

Consumers are also willing to spend more on major purchases, potentially a sign of growing confidence in what has been a stop-and-start expansion. Auto sales jumped in May to the highest level in nearly a decade.

And the biggest purchase of all — a home — is becoming reality for more people. Sales of existing homes jumped 5.1 percent in May and are on track for their best year since 2007. New home sales also rose last month, reaching their highest level since February 2008.

Growth should reach 2.6 percent in the second quarter, according to forecasting firm Macroeconomics Advisers. That would still leave growth in the first half at a weak 1.2-percent annual rate. But many economists expect further improvement in the second half of the year to 3 percent.

More paychecks are boosting confidence. Employers have added 3.1 million jobs in the past 12 months, lowering the unemployment rate to 5.5 percent from 6.3 percent.

Incomes are showing signs of picking up. Average hourly earnings increased 2.3 percent in May compared with a year earlier, the fastest in nearly two years, though still a tepid pace. But in the past three months, hourly wage growth has reached a healthier annual rate of nearly 3 percent, according to Capital Economics.