The economy got off to an even weaker start this year than first thought, the government reported Friday, as economic activity contracted amid a disappointing trade picture and continued caution on spending by businesses and consumers alike.
The 0.7 percent decline in economic output in the first quarter of 2015 was a reversal of the initial 0.2 percent advance for the periodreported last month by the Commerce Department.
While statistical quirks and one-time factors like wintry weather in some parts of the country played a role, as did a work slowdown at West Coast ports, the lackluster report for January, February and March underscores the American economy’s seeming inability to generate much momentum.
Much of the revision was spurred by fresh data showing businesses added to inventories at a slower pace than first estimated, while net exports fell slightly more than first thought. A sharp pullback in energy exploration in the wake of falling oil prices is also putting pressure on business investment.
Most experts had expected Friday’s data to show a contraction in the first quarter, and virtually no mainstream economists believe the country is on the verge of a recession. Still, the weakness is a reason the Federal Reserve is not expected to raise short-term interest rates until the second half of 2015, after speculation that a June increase was possible.
Consumers, who generate roughly two-thirds of growth, have also been less willing to open their wallets, despite the windfall provided by lower gasoline prices. Personal consumption rose by 1.8 percent last quarter, down from 4.4 percent in late 2014.
After the economy grew at an annual rate of nearly 5 percent in the springand summer of 2014, some experts concluded that the economy had found its footing and predicted that a healthier, sustained growth rate of near 3 percent was finally at hand.
The new data for the first quarter, and signs of only a tepid rebound in the current, second quarter of 2015, are now forcing some economists to rethink earlier assumptions.
“This isn’t the off-to-the-races kind of expansion we envisioned six months ago,” said Scott Anderson, chief economist at Bank of the West in San Francisco. “More and more folks are coming around to the view that the long-term growth rate of the American economy is 2 percent, at best. We can’t sustain 3 or 4 percent growth for very long, so it’s two steps forward, one step back.”
While cloudy, the economic outlook is not necessarily dark.
Unemployment has been falling steadily, and experts think it could fall to about 5 percent by the end of the year, from 5.4 percent now. The jobless rate stood at 8 percent a little over two years ago.
The real estate market has also been robust as of late, with a measure of pending home sales last month hitting a nine-year high, according to data released Thursday by the National Association of Realtors. New-home sales and construction were also strong in April.
Indeed, an upward revision in residential construction last quarter actually offset some of the weakness elsewhere.
And experts say some of the weakness in the first quarter of the year reflects how the numbers are crunched by government statisticians to account for seasonal variations, like the retail slowdown that follows the holiday shopping season or less business activity as temperatures plunge.
That process, known as seasonal adjustment, may indeed have exaggeratedthe underlying weakness last quarter, according to an analysis by private economists at firms like Barclays and Macroeconomic Advisers, as well as at the Federal Reserve Bank of San Francisco. In first quarter of 2014, thewinter slowdown was even more pronounced, with the economy contracting at an annual rate of 2.1 percent.
Whatever role seasonal adjustments did play, Mr. Anderson cautions against dismissing the first quarter weakness as a statistical quirk.
“Some economists have been trying to explain away the negative numbers,” he said.. “I don’t think it’s so easily dismissed. We will get a modest bounce back this quarter.”
In particular, he said, the dollar’s surge against foreign currencies like the euro is hurting manufacturers and other exporters, a trend likely to continue even with the resolution of the West Coast port slowdown.
Although he expects the annual rate of growth to rebound to above 2 percent this quarter and to about 3 percent in the second half of 2015, that still leaves his estimate at 2.2 percent for the annual growth rate for the year. Last year, the economy grew at an annual rate of 2.4 percent.
“There’s some truth to the statistical issues and the one-time factors, but we are still left with a real deceleration,” Mr. Anderson said. “Two percent is probably where the economy will gravitate longer term.”
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