Nelson D. Schwartz of The New York Times writes A Revision Shows the Economy Shrank Last Quarter, according to the Commerce Department, which showed that economy shrank at annual rate of 1% in the first quarter, a downward revision from its first estimate which predicted a slight gain.
The bulk of the downward revision in gross domestic product was driven by reduced additions to inventories by businesses as well as a slightly weaker trade balance than first thought. The smaller stockpiles alone subtracted 1.6 percent from the growth rate.
“Ouch,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients immediately after the release of the report. “The bad news is that the headline G.D.P. number is worse than consensus, but the good(ish) news is that almost all the hit is in the inventory component.”
To be sure, lower additions to inventories by businesses in the first quarter suggest that factor won’t weigh on growth as much in the second quarter, when other economic indicators are expected to pick up. Most economists expect the growth rate to rise to 3 to 4 percent in the second quarter.
Many other economist agree that the economic growth rate the year should be strong and in the range of 3% to 4%, and that the primary cause for the forth quarter slowdown was a one time inventory correction. .
Also today, the Department of Labor reports that initial claims for unemployment last wee dropped more sharply than expected, a critical factor also suporting sustained economic improvement.
Paul Davidson of the Bureau of Economic Analysis from Haver An reports U.S. economy shrank at 1% annual pace in 1Q, according to a report by the Commerce Department.
Last quarter's drop was largely due to businesses boosting inventories more slowly after aggressively adding to them late last year.
Adverse winter weather also contributed to the contracting economy. Non-residential construction plunged 7.5%, vs. the 0.2% gain initially estimated.
And state and local government spending fell 1.8%, vs. an initial estimate of 1.3%.
On the positive side, consumer spending rose 3.1%, slightly more than the 3% first believed. And housing construction declined 5%, less than the initial estimate of 5.7%.
Paul Ashworth, and economist of Capital Economics reassured those worried about the drop in first quarter economic growth that employment increased by nearly 300,000 in April.
9:40 AM PT: For those interested in more detailed breakouts of how the components of GDP changed here is are some paragraphs from the WSJ.
Ben Leubsdorf of the Wall Street Journal reports, GDP Contracted at 1% Pace in First Quarter
Consumer spending, which accounts for more than two-thirds of U.S. economic output, grew at a 3.1% pace in the first quarter, revised up from an initial estimate of growth at a 3% pace. Spending on services, like health care and household heating, grew at a 4.3% pace while spending on physical goods rose at a more modest 0.7% pace.
The slowing housing market also was a drag on the economy in the first quarter, with residential fixed investment contracting at a 5% pace and subtracting 0.16 percentage point from GDP growth. The Commerce Department had initially estimated the category declined at a 5.7% pace and subtracted 0.18 percentage point from GDP growth.
Government spending cuts have weighed on growth in recent years, though the effect was less pronounced in the first three months of 2014. Total government spending subtracted 0.15 percentage point from GDP for the quarter, compared with an initial estimate of 0.09 percentage point subtracted from growth. Federal spending was a slight boost to overall economic growth, but state and local government cutbacks created as a larger drag.