US economy contracts in first quarter; dollar hurts

US economy contracts in first quarter; dollar hurts

Larger trade deficit, smaller inventories cited as reason

US economy contracts in first quarter; dollar hurts

The US economy contracted in the first quarter as it buckled under the weight of unusually heavy snowfalls, a resurgent dollar and disruptions at West Coast ports, but activity already has rebounded modestly.

The government on Friday slashed its gross domestic product estimate to show GDP shrinking at a 0.7 per cent annual rate instead of the 0.2 per cent growth pace it estimated last month.

A larger trade deficit and a smaller accumulation of inventories by businesses than previously thought accounted for much of the downward revision. There was also a modest downward revision to consumer spending.

With growth estimates for the second quarter currently around 2 per cent, the economy appears poised for its worst first-half performance since 2011. The economy’s recovery from the 2007-09 financial crisis has been erratic.

Weak data on consumer sentiment and factory activity in the Midwest on Friday suggested that while the economy has pulled out of its first-quarter soft patch, the growth pace was modest early in the second quarter. That mirrored other recent soft data on retail sales and industrial production.

But reports on housing and business spending plans have indicated momentum could be building, which would keep the Federal Reserve on track to raise interest rates later this year.

Economists caution against reading too much into the slump in output. They argue the GDP figure for the first quarter was held down by a confluence of temporary factors, including a problem with the model the government uses to smooth the data for seasonal fluctuations. Economists, including those at the San Francisco Federal Reserve Bank, have cast doubts on the accuracy of GDP estimates for the first quarter, which have tended to show weakness over the last several years.

They argued the so-called seasonal adjustment is not fully stripping out seasonal patterns, leaving “residual” seasonality. The government said last week it was aware of the potential problem and was working to minimise it.

Dollar, energy drag

The economy, which expanded at a 2.2 per cent pace in the fourth quarter, was hammered by a sharp decline in investment spending in the energy sector.
Trade was hit both by the strong dollar and the ports labor dispute, which weighed on exports through the quarter and then unleashed a flood of imports in March after it was resolved.

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