U.S. economy contracts sharply, consumer spending revised down

WASHINGTON Wed Jun 25, 2014 7:13pm IST

Workers use remote controls to check 32-inch television sets before they are repackaged at Element Electronics in Winnsboro, South Carolina May 29, 2014. REUTERS/Chris Keane

Workers use remote controls to check 32-inch television sets before they are repackaged at Element Electronics in Winnsboro, South Carolina May 29, 2014.

Credit: Reuters/Chris Keane

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WASHINGTON (Reuters) - The U.S. economy contracted at a much steeper pace than previously estimated in the first quarter to record its worst performance in five years, but there are indications that growth has since rebounded strongly.

The Commerce Department said on Wednesday gross domestic product fell at a 2.9 percent annual rate, instead of the 1.0 percent pace it had reported last month.

While the economy's woes have been largely blamed on an unusually cold winter, the magnitude of the revision suggests other factors at play beyond the weather.

Growth has now been lowered by a total of 3.0 percentage points since the government's first estimate was published in April, which had the economy expanding at a 0.1 percent rate.

The difference between the second and third estimates was the largest on records going back to 1976. Revisions to GDP numbers are not unusual as the government does not have complete data when it makes its initial and preliminary estimates.

Economists had expected growth to be revised to show it contracting at a 1.7 percent rate.

U.S. stock index futures fell on the data, while prices for U.S. government debt rose. The dollar fell against a basket of currencies.

The latest revisions reflect a weaker pace of healthcare spending than previously assumed, which caused a downgrading of the consumer spending estimate. Trade was also a bigger drag on the economy than previously thought.

ECONOMY GROWING

The economy grew at a 2.6 percent pace in the final three months of 2013. Data on employment, manufacturing and services sectors point to a sharp acceleration in growth early in the second quarter.

However, the pace of expansion could fall short of expectations, which range as high as a 3.6 percent rate.

In a second report, the department said orders for long-lasting U.S. manufactured goods fell 1.0 percent last month.

Orders for these items, which range from toasters to aircraft that are meant to last three years or more, fell for the first time in three months.

They were dragged down by weak demand for transportation, machinery, computers and electronic products; electrical equipment, appliances and components; as well as a 31.4 percent plunge in defense capital goods orders.

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

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 1.0 percent rate. It was previously reported to have advanced at a 3.1 percent pace.

Exports declined at a 8.9 percent rate, instead of a 6.0 percent pace, resulting in a trade deficit that sliced off 1.53 percentage points from GDP growth. Weak export growth has been tied to frigid temperatures during the winter.

Other drags to first-quarter growth included a slow pace of restocking by businesses, a sharp drop in investment on non-residential structures such as gas drilling and weak government spending on defense.

Businesses accumulated $45.9 billion worth of inventories, a bit less than the $49.0 billion estimated last month. Inventories subtracted 1.70 percentage points from first-quarter growth, but should be a boost to second-quarter growth.

A measure of domestic demand that strips out exports and inventories expanded at a 0.3 percent rate, rather than a 1.6 percent rate.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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