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US economy slowed to 0.1 per cent growth rate in Q1, weakest in year, reflecting harsh winter

WASHINGTON - The U.S. economy slowed sharply in the first three months of the year as a harsh winter exacted a toll on business activity. The slowdown, while worse than expected, is likely to be temporary as growth rebounds with warmer weather.

Growth slowed to a barely discernible 0.1 per cent annual rate in the January-March quarter, the Commerce Department said Wednesday. That was the weakest pace since the end of 2012 and was down from a 2.6 per cent rate in the previous quarter.

Many economists said the government's first estimate of growth in the January-March quarter was skewed by weak figures early in the quarter. They noted that several sectors — from retail sales to manufacturing output — rebounded in March. That strength should provide momentum for the rest of the year.

And on Friday, economists expect the government to report a solid 200,000-plus job gain for April.

"While quarter one was weak, many measures of sentiment and output improved in March and April, suggesting that the quarter ended better than it began," said Dan Greenhaus, chief investment strategist at global financial services firm BTIG.

Still, the anemic growth last quarter is surely a topic for discussion at the Federal Reserve's latest policy meeting, which ends Wednesday afternoon.

In its report, the government said consumer spending grew at a 3 per cent annual rate last quarter. But that gain was dominated by a 4.4 per cent rise in spending on services, reflecting higher utility bills and an expansion in health care spending from provisions of the Affordable Care Act. Spending on goods barely rose. Also dampening growth were a drop in business investment, a rise in the trade deficit and a fall in housing construction.

The scant 0.1 per cent growth rate in the gross domestic product, the country's total output of goods and services, was well below the 1.1 per cent rise economists had predicted. The last time a quarterly growth rate was so slow was in the final three months of 2012, when it was also 0.1 per cent.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he expects growth to rebound to a 3 per cent annual rate in the current April-June quarter. Other economists have made similar forecasts.

A variety of factors held back first-quarter growth. Business investment fell at a 2.1 per cent rate, with spending on equipment plunging at a 5.5 per cent annual rate. Residential construction fell at a 5.7 per cent rate. Housing was hit by winter weather and by other factors such as higher home prices and a shortage of available houses.

A widening of the trade deficit, thanks to a sharp fall in exports, shaved growth by 0.8 percentage point in the first quarter. Businesses also slowed their restocking, with a slowdown in inventory rebuilding reducing growth by nearly 0.6 percentage point.

Consumer spending on goods rose just 0.4 per cent, the smallest gain in nearly three years. That made for a tough quarter for The Legacy Companies, a Fort Lauderdale, Fla.-based company that makes blenders, juicers and other kitchen supplies.

Neal Asbury, the CEO, said his U.S. sales fell 5 per cent in the first quarter. Retailers such as Macy's, Bed Bath and Beyond and Kohl's had stocked up on his company's wares in anticipation of solid first-quarter sales, as in previous years. This year, "that didn't happen to the degree people expected it to happen."

But in recent weeks, retailers have started to clear out their excess supplies, Asbury said. That could boost his company's sales in future months once retailers need to restock.

"We seem to be through the worst part of it," he said.

Also holding back growth: Less spending by state and local governments. That pullback offset a rebound in federal activity.

Economists say most of the factors that depressed growth in the first quarter have already begun to reverse. Most say stronger growth should endure through the rest of the year as the economy derives help from job gains, rising consumer spending and a rebound in business investment.

In fact, many analysts believe 2014 will be the year the recovery from the Great Recession finally achieves the robust growth that's needed to accelerate hiring and reduce still-high unemployment. Many analysts think annual economic growth will remain around 3 per cent for the rest of the year.

If that proves accurate, the economy will have produced the fastest annual expansion in the gross domestic product, the broadest gauge of the economy's health, in nine years. The last time growth was so strong was in 2005, when GDP grew 3.4 per cent, two years before the nation fell into the worst recession since the 1930s.

A group of economists surveyed this month by The Associated Press said they expected unemployment to fall to 6.2 per cent by the end of this year from 6.7 per cent in March.

One reason for the optimism is that a drag on growth last year from higher taxes and deep federal spending cuts has been diminishing. A congressional budget truce has also lifted any imminent threat of another government shutdown. As a result, businesses may find it easier to commit to investments to modernize and expand production facilities and boost hiring.

"Growth came to a grinding halt early this year, but with consumers spending and payrolls expanding, the future looks a lot brighter," said Joel Naroff, chief economist at Naroff Economic Advisors.

___

AP Economics Writer Christopher S. Rugaber contributed to this report.

The Canadian Press


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