The U.S. economy shrank 0.7 percent during the first three months of 2015, the Commerce Department said Friday in a widely expected revision of an earlier estimate that underscored ongoing economic vulnerability.
Economists had expected the government to revise last month’s first estimate of anemic 0.2 percent growth in the nation’s gross domestic product _ the sum of U.S. goods and services- taking into account more information about international trade flows. The reported shrinkage of 0.7 percent was actually better than most mainstream forecasts of 0.9 percent or more.
Exports dropped sharply in the three-month period, in part because weak demand abroad and partly due to the strong U.S. dollar that’s made American goods and services more expensive overseas.
“The first-quarter slowdown was the result of harsh winter weather, tepid foreign demand, and consumers saving the windfall from lower oil prices,” Jason Furman, head of the White House Council of Economic Advisers, said in his blog.
Traditionally, if the economy shrinks two quarters in a row it is in recession. So has the U.S. economy quietly entered recession?
“We expect a rebound in second quarter growth to around 2 percent,” said Nariman Behravesh, chief economist for forecaster IHS Global Insight. “Although much of the first quarter decline was attributable to severe winter weather and the West Coast port disruptions, ongoing drag from trade and inventories will limit the bounce-back.”
Most economists have revised their optimistic forecasts and now expect another year of growth in the range of 2.5 to 3 percent. Consumption and strong hiring continues to keep the U.S. economy skating clear of recession.
“The combination of personal consumption and fixed investment, the most stable components of GDP, has grown 3.4 percent over the past four quarters,” said Furman, pointing to underlying growth.
Growth is hardly robust, however, and that leaves the U.S. economy vulnerable to external shocks like a currency crisis in Europe or a sharper downturn in China.
“I now expect real GDP growth of 2.4 percent for 2015, with growth in the second quarter of roughly 2.8 percent,” said Chad Moutray, chief economist of the National Association of Manufacturers. “That suggests modest growth moving forward, but also some disappointment after manufacturers were hoping that this would finally be the year that we would get some traction in the economy.”
Economists also shrugged off the weak first-quarter numbers because the agency that compiles them, the Bureau of Economic Analysis, recently acknowledged that there may be problems in how it measures the first quarter every year. It pledges a series of fixes later this year.
The acknowledgment came after a report last month from CNBC that found first-quarter GDP data have been weaker than the other three quarters for the past 30 years, and especially so over the past five years. Economists think it’s a statistical issue involving patterns that remain in the data even after being adjusted for seasonal variations.
“The quarterly movements in real GDP are at this point pretty meaningless until the BEA cleans up the massive residual seasonality it now admits is exhibited by GDP in the first quarter,” economists at RDQ Economics noted in an investment note on Friday. “Our preference, for now, is to remain focused on the jobs data … . The jobs data suggests growth remains solid and we expect GDP growth to rebound and affirm that message.”
CORRECTION: Earlier versions of this story mistakenly noted that a recession is traditionally defined as shrinking over two consecutive months. GDP is measured on a quarterly basis and recession is loosely defined as two straight quarters of contraction.