US economic growth slows sharply to 0.1% in first quarter

US winter storms Unusually bad winter weather had contributed to the economic slowdown, the US Commerce Department said

US economic growth slowed sharply in the first quarter of the year, growing at an annual rate of 0.1%.

The rate is the slowest for a year and a large fall on the 2.6% increase in gross domestic product (GDP) in the final quarter of last year.

An unusually cold and disruptive winter, coupled with tumbling exports, contributed to the decline, the US Commerce Department said.

But it said economic activity already appeared to be bouncing back.

Business investment fell by 2.1%, with spending on equipment plunging by 5.5% at an annual rate compared with a year earlier.

Residential construction, which was inevitably hit by the unusually cold winter fell by 5.7% although it was also hit by higher house prices and a shortage of available homes for sale.

Analysis

This is a standstill number. If we follow the British practice of giving the figures as a quarterly growth rate to one decimal place we get 0.0%.

Yes, we knew that bad winter weather would be, as it were, a headwind that would slow the US economy down. But this was a much sharper loss of momentum than expected.

It does give some support to the views of the Federal Reserve Chair Janet Yellen that the economy is not back to normal health and will need the stimulus from Fed policies for some time yet.

Still, consumer spending was quite strong in the new figures and the chances are that the slowdown in growth will be relatively short-lived.

The US trade trade deficit deficit widened, thanks to a sharp fall in exports which shaved growth by 0.8 percentage points in the first quarter. Businesses also slowed their restocking, with a slowdown in inventory rebuilding reducing growth by nearly 0.6 percentage points.

But consumer spending - which drives 70% of growth in the US economy - grew by 3%, although the increase was dominated by a 4.4% rise in spending on services, reflecting higher utility bills during the bitterly cold winter.

Rebound

A cutback in spending by state and local governments also helped offset a rebound in federal activity after the 16-day partial government shutdown last year.

But most economists expect a strong rebound in growth in the April-June quarter. The consensus view is the economy will expand by 3% in the second quarter.

Analysts said stronger growth will endure through the rest of the year as the economy derives help from improved job growth, rising consumer spending and a rebound in business investment.

"Everything else is showing us that the economy is picking up," said Gus Faucher, from PNC Financial Services in Pittsburgh.

"This weakness is not carrying through to the second quarter."

Exterior of US federal reserve The Federal Reserve has been buying bonds to keep interest rates low and boost growth

In fact, many analysts believe 2014 will be the year the recovery from recession finally achieves the robust growth needed to accelerate hiring and reduce still-high unemployment.

If the economy rebounds as strongly as they suggest, it will have experienced the fastest annual expansion in the economy in nine years.

Tapering to stay

The last time growth was as strong was in 2005, when GDP grew 3.4%, two years before the nation fell into the worst recession since the 1930s.

Unemployment is expected to fall to 6.2% by the end of this year from 6.7% in March.

Joel Naroff, chief economist at Naroff Economic Advisors, said he expected job growth to average above 200,000 a month for the rest of the year - starting with the April jobs report, which will be released Friday.

"Those are the types of job gains which will generate incomes and consumer confidence going forward," he added.

The growth figures come a few hours before a policy statement from the US Federal Reserve, the country's central bank.

But few expect the disappointing news to have any impact on the scaling back of the Fed's economic stimulus, which has seen it cut bond purchases by $10bn per month.

"We rule out that the Fed will modify its policy outlook on the back of today's GDP report and the gradual tapering is set to continue in the coming months," said Annalisa Piazza, from Newedge Strategy in London.

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