A Revision Shows the Economy Shrank Last Quarter

A Revision Shows the Economy Shrank Last Quarter

Clearing snow from the roof of a new home in Ohio in February. A harsh winter was blamed for part of the economic contraction in early 2014.   CreditTony Dejak/Associated Press

By Nelson D. Schwartz
Originally published in The New York Times.

It was a quarter to forget.

Even as the winter of 2014 fades in the rearview mirror and growth shows signs of picking up, it is becoming clearer just how much the economy slowed in the first quarter.

The Commerce Department said Thursday the economy shrank at an annual rate of 1 percent in the first quarter, revising its initial estimate last month that showed a very slight gain for the period. It is the first quarter in three years in which the nation’s output of goods and services has contracted.

The bulk of the downward revision in gross domestic product was driven by reduced additions to inventories by businesses as well as a slightly weaker trade balance than first thought. The smaller stockpiles alone subtracted 1.6 percent from the growth rate.

“Ouch,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients immediately after the release of the report. “The bad news is that the headline G.D.P. number is worse than consensus, but the good(ish) news is that almost all the hit is in the inventory component.”

To be sure, lower additions to inventories by businesses in the first quarter suggest that factor won’t weigh on growth as much in the second quarter, when other economic indicators are expected to pick up. Most economists expect the growth rate to rise to 3 to 4 percent in the second quarter.

In a separate economic report from the Labor Department on Thursday, initial claims for unemployment last week dropped more sharply than expected. That suggests the labor market continues to improve, Mr. Shepherdson said, a critical factor if the economy is to achieve sustained momentum in the future.

“This report is more important than the G.D.P. numbers, in our view, because it strongly supports the idea that labor market conditions are improving markedly, despite weak headline growth during the winter,” Mr. Shepherdson added.

A final revision of the first quarter’s performance will be released June 25.

“I don’t believe the economy is in any danger,” said Gus Faucher, senior economist at PNC Financial Services, in an interview before the release of the data. “We had a hit in terms of weather and we will see a bounce-back in activity in the second quarter.”

Still, the on-again, off-again pattern of economic expansion in the current recovery explains why so many Americans remain skeptical that things really are getting better, despite strong corporate profits and a booming stock market.

Earlier this week, the Standard & Poor’s 500-stock index hit a fresh high, and the index is up over 3 percent so far this year. In 2013, the S.&P. index rose nearly 30 percent.

Despite the likelihood of a pickup this quarter, economists have been reassessing the prospects for growth over the next year or two, said Michael Hanson, senior United States economist at Bank of America Merrill Lynch.

“Many market participants are pricing in lower growth than they expected six months ago,” said Mr. Hanson, adding that these concerns about the potential of the economy to sustain faster growth over time may help explain why investors have piled into Treasury bonds recently, including on Wednesday, driving yields sharply lower.

At 2.45 percent Wednesday, the yield on the benchmark 10-year Treasury bond was close to lows last seen a year ago, when the Federal Reserve started to signal it would begin easing its efforts to stimulate the economy.

Treasury bond yields typically rise when economic growth picks up, but yields are half a percentage point lower now than they were at the start of 2014. Fed officials have said they plan to keep reducing their stimulus efforts through the end of 2014 and have indicated they will begin raising short-term rates in the second half of 2015.

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