Business

US GDP shrinks 2.9% in first quarter

  • 25 June 2014
  • From the section Business
US winter storms
Unusually bad winter weather contributed to the economy's poor performance

The US economy suffered its worst performance for five years in the first quarter of 2014, latest figures show.

The economy shrank at an annualised rate of 2.9% in the first three months of the year, the third estimate from the US Commerce Department showed.

This was worse than the previous estimate of a 1% contraction, and also worse than economists' expectations.

However, the economy is expected to have recorded a sharp recovery during the second quarter of the year.

The White House said the figures showed the economic recovery was still in progress, but added other indicators for April and May suggest a rebound in the second quarter.

Spending downgrade

The unusually cold weather in the first quarter of the year has been blamed for the poor performance of the economy.

However, the gap between the second and third estimates of US growth for the quarter was the largest on record.

The latest revision came as a result of a weaker pace of healthcare spending than previously assumed, which caused a downgrading of the consumer spending estimate.

Consumer spending - which is responsible for more than two-thirds of US economic growth - increased by 1% in the quarter, rather than the 3.1% rate as first estimated.

Trade was also a bigger drag on the economy than previously thought, with exports falling by 8.9% rather than a previously estimated 6%.

US markets appeared unfazed by the first quarter GDP estimate

Analysis

Michelle Fleury, BBC New York

On the surface, the latest US GDP number is unnerving. The first three months of this year were far weaker than expected.

Many Americans may feel as if the recovery has taken one step forward and two steps back. But plenty of economists argue that the glass is in fact half full.

Disappointing though the news is, they argue it's misleading to suggest the US is headed back into recession. Yes, healthcare spending fell and exports were weaker at the start of the year.

But the most recent data shows consumers are feeling better as job opportunities improve and business orders are picking up.

If the optimists turn out to be right, the world's largest economy should show a return to growth in the second quarter.

The US stock market's positive reaction shows investors seem willing to buy into that idea.

'Temporary setback'

The first quarter figures are all the more startling as the economy grew by 2.6% in the final three months of 2013.

But economists said more recent unemployment, manufacturing and service sector data all pointed to a sharp turnaround in the second quarter.

Analysts have forecast the economy could bounce back by as much as 4% in the second quarter.

Stuart Hoffman, chief economist at PNC Financial, said: "We have ample evidence that the first quarter was just a temporary setback for the economy, and we are climbing out of the hole in the current quarter."

Mark Zandi, chief economist at Moody's Analytics, said: "We should have a much better second half this year and a much better 2015 than 2014."

Jason Furman, chairman of the Council of Economic Advisers, said: "The recovery from the great recession, however, remains incomplete, and the president will continue to do everything he can to support the recovery, either by acting through executive action or by working with Congress on steps that would boost growth and speed job creation."

Last week, the US Federal Reserve cut its growth forecast for 2014 because of the harsh winter weather.

The central bank is now predicting growth of between 2.1% and 2.3% for this year, down from its March forecast of 2.8% to 3%.

However in its accompanying statement, the bank noted that economic activity had "rebounded in recent months".

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