US growth seen rebounding after contraction due to severe winter

PUBLISHED : Friday, 30 May, 2014, 1:10am
UPDATED : Friday, 30 May, 2014, 1:10am

The US economy contracted in the first quarter for the first time in three years as it buckled under the weight of a severe winter, but there are signs activity has since rebounded.

The Department of Commerce cut its estimate of gross domestic product to show the economy shrank at a 1 per cent annual rate.

The worst performance since the first quarter of 2011 reflected a far slower pace of inventory accumulation and a bigger than previously estimated trade deficit. Both are temporary factors which should fade and unleash a surge in growth this quarter.

The race isn’t over yet for the economy. We are still expecting a strong finish

"The race isn't over yet for the economy. We are still expecting a strong finish to the year. Inventory levels will rebuild, pushing GDP to nearly 4 per cent in the second quarter," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Gross domestic product was initially estimated to have grown at a 0.1 per cent rate. It is not unusual for the government to make sharp revisions to GDP numbers as it does not have complete data when it makes its initial estimates.

The decline also reflected a plunge in business spending on nonresidential structures. The economy grew at a 2.6 per cent pace in the fourth quarter.

Investors shrugged off the report. US stocks opened higher, with the Standard & Poor's 500 index hitting a fresh high. Prices for US Treasury debt rose, while the dollar was little changed against a basket of currencies.

Economists estimate severe weather could have chopped off as much as 1.5 percentage points from GDP growth. The government, however, gave no details on the impact of the weather.

Other data yesterday from the Department of Labour showed first-time applications for state unemployment benefits declined 27,000 to a seasonally adjusted 300,000 last week.

The four-week moving average for new claims, a better measure of underlying labour market conditions, hit its lowest level since August 2007.

Separately, pending contracts to buy previously owned homes rose in April for a second month, a positive sign for the troubled housing market. The reports added to data on manufacturing and hiring that have buoyed hopes of a strong rebound in growth in the second quarter.

Businesses accumulated US$49 billion worth of inventories in the first three months of the year, far less than the US$87.4 billion estimated last month.