U.S. economy stalls in Q1, but fundamentals still sound

WASHINGTON Thu May 1, 2014 6:49am IST

Traders work on the floor of the New York Stock Exchange April 30, 2014. REUTERS/Brendan McDermid

Traders work on the floor of the New York Stock Exchange April 30, 2014.

Credit: Reuters/Brendan McDermid

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WASHINGTON (Reuters) - The U.S. economy barely grew in the first quarter as the severe winter hampered exports and led businesses to curtail investment spending, but activity already appears to be bouncing back.

Gross domestic product expanded at a 0.1 percent annual rate, the slowest since the fourth quarter of 2012, the Commerce Department said on Wednesday.

"This quarter was impacted heavily by the weather. Growth is down, but not out, not by a long shot, and we look for it to quicken later on in the spring," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

The slowdown, which also reflected the slowest inventory accumulation in nearly a year, was much sharper than Wall Street had braced for. Economists expected a 1.2 percent growth pace.

It suggested the economy could struggle to achieve the 3 percent break-out growth that had been widely anticipated this year, but did little to alter forecasts for coming quarters.

Federal Reserve officials, who concluded a two-day policy meeting just hours after the government released its first snapshot of first-quarter growth, brushed aside the slowdown. They focused instead on other data that have suggested strength at the tail end of the quarter.

In its statement, the Fed said "growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions."

The U.S. central bank announced a further reduction in the amount of money it is pumping into the economy through monthly bond purchases.

Separate reports on Wednesday showed private employers added 220,000 workers to their payrolls in April, while business activity in the Midwest hit a six-month high, with new orders surging and employment rising.

U.S. stocks were trading higher, but the dollar fell against a basket of currencies. Prices for U.S. government debt rose.

NO FUNDAMENTAL WEAKNESS

"Our bet is that the weakness we are seeing is still more transitory than fundamental," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

Economists estimate severe weather could have chopped off as much as 1.4 percentage points from GDP growth. The government, however, gave no details on the impact of the weather.

Businesses restocked inventories to the tune of $111.7 billion in the final three months of last year, but added only $87.4 billion more to stocks in the first quarter, the smallest amount since the second quarter of 2013.

The slowdown in restocking subtracted 0.57 percentage point from GDP growth in the first quarter, but inventories should be a boost to second-quarter growth.

"It looks like most of the inventory correction will be contained in the first quarter," said Daniel Silver, an economist at JPMorgan in New York.

Trade lopped off 0.83 percentage point from growth, partly because of the weather, which left goods piling up at ports. Exports fell at a 7.6 percent rate, the largest quarterly decline in five years, after growing at a 9.5 percent pace in the final three months of 2013.

A measure of domestic demand that strips out exports and inventories expanded at a 1.5 percent rate and there were virtually no signs of inflation pressures.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.0 percent rate, reflecting a spurt in spending on services linked to demand for heating and the Affordable Healthcare Act, which expanded healthcare coverage to many Americans.

Spending on services grew at its quickest pace since the second quarter of 2000, with healthcare contributing a solid 1.10 percentage points to GDP growth.

Spending on goods, however, slowed sharply, indicating that the frigid temperatures had reduced foot traffic to shopping malls. Consumer spending had increased at a brisk 3.3 percent pace in the fourth quarter.

Harsh weather also undercut business spending on equipment, which fell at its fastest pace in nearly five years. While investment in nonresidential structures, such as gas drilling, rebounded, the increase was minor.

Investment in home building contracted for a second straight quarter, another sign of the hit from the weather, although a rise in mortgage rates over the past year has also hurt.

A second quarter of contraction in spending on home building suggests a housing recession. A bounce back, however, is expected in the April-June period.

"The technical recession in housing is a major yellow flag in terms of the strength of the domestic economy. It will be a while before the Fed starts raising interest rates," said Brian Bethune, chief economist at Alpha Economic Foresights in Boston.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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