The government on Thursday revised away what little growth had been estimated for the first three months of 2014, determining instead that the economy shrunk at an annualized rate of 1 percent for the period.
In a move widely expected, the Commerce Department’s second estimate of growth from January through March wiped away the minimal 0.1 percent rate in favor of an actual contraction. The unusually harsh winter was blamed for what now is thought to be a contraction of at least 1 percent.
The culprit for the downward revision on growth estimates, said analysts, were larger-than-expected drags from a trade deficit and businesses failing to stock up their shelves and warehouses during the rough winter. This trend is already in the process of reversing itself.
“Almost all of the downward revision came from a near halving in the estimated rate of inventory accumulation,” Alan Levenson, chief economist for T. Rowe Price Associates, said in a note to investors. “Inventory building is unlikely to be a drag on current quarter growth; indeed, there is scope for a small contribution in the possibility of a return to the post-recession trend.”
The White House agreed.
“Overall the first quarter was subject to a number of notable influences, including historically severe winter weather, which temporarily lowered growth,” said Jason Furman, head of the Council of Economic Advisers. “A range of more up-to-date data from March and April, including jobs, manufacturing, housing and other indicators, provide a more accurate and timely picture of where the economy is today.”
The housing sector weighed on growth during the first quarter, with home building and sales of existing homes disappointing. That too is expected to begin turning around in the second quarter reading of gross domestic product, the broadest measure of output of U.S. goods and services.
“At this point, we conservatively project a 4 percent increase in real GDP in the second quarter,” wrote economists John Ryding and Conrad DeQuadros at RDQ Economics in New York. “However, we continue to lower the emphasis we have been putting on quarterly GDP movements as an indicator of the cyclical state of the economy.
There are numerous signs in the economy of gathering steam, however, ranging from a return to spending and investment by businesses to rising consumer confidence that is leading to more spending.
“Consumer spending remains strong, increasing at a 3.1% annual rate,” noted Doug Handler, chief U.S. economist for forecaster IHS Global Insight.
Employment indicators are also improving. One of those came Thursday with the latest release of first-time claims for unemployment benefits, which fell by 27,000 to 300,000 for the week that ended on May 24 and is beginning to approach levels seen in a healthy economy.
Housing continues to be a wild card, however, with Federal Reserve Chair Janet Yellen and colleagues also voice concern about sluggish activity despite mortgage rates that are unusually low by historical standards.
The National Association of Realtors on Thursday reported that pending home sales, as measured on its index, increased by 0.4 percent over March numbers. That forward-looking indicator of signed contracts for home purchases is a modest improvement, but remains 9.2 percent where it stood in April 2013, the group said.