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US GDP shrinks in Q1, Outlook Mixed

Posted by Joseph Trevisani on May 29, 2014 1:09:00 PM

The American economy contracted for the first time in three years in the first quarter as firms reversed the large inventory build-up which had powered expansion in the second half of last year.

Gross domestic product, the measure of all goods and services produced in the country, declined at a 1 percent annual rate in the first three months of the year, reported the Commerce Department in Washington D.C. today. The drop was  twice the  0.5 percent median forecast from the Bloomberg survey of economists and lower than the estimates of all 79 economists polled. This was the second negative quarter since the end of the recession in June 2009; in the first quarter of 2011 GDP slipped 1.3 precedents.

There is one more revision to this statistic on June 25th.

With the unexpectedly large decline in the first quarter the economy would have to have to expand at 4.07 percent for the remaining three quarters to reach the lower  limit of the Fed's current central GDP tendency of 2.8-3.0 percent.

Such an economic spurt would be 76 percent faster than the 2.3 percent rate of the past four years. The United States has not sustained a 4 percent annual growth rate for more than one quarter since averaging 5.75 percent in the third and fourth quarters of 2003.

Personal consumption rose at a 3.1 percent annual rate from January to March, as forecast, up from the 3.0 percent initial reading.

Growth is expected to return in the second and third quarters but the predicted rate is open to much debate among analysts.

Several indicators such as manufacturing and services PMI, payrolls and unemployment claims point to better  economic conditions ahead and more spending flexibility for consumers, while others  in wages, housing, labor force participations and retail sales  hint at constraints  on household budgets and  the 70 percent of the economy that derives from consumer spending.

The April ''retail sales control group', that mirrors the  consumption portion of  the government's GDP calculation  showed no sign of  the expected pent-up demand  predicated on a weather related drop in purchases in the prior three months. This category of sales dropped 0.1 percent in April, far below the 0.5 percent gain forecast, though the March accounting was revised from 0.8 percent to 1.3 percent.

Inflation also saw a significant jump in April, rising 0.5 percent annually to 2.0 percent, largely on higher food prices. With household income static this also could inhibit a consumption rebound.

Adding to the questions on the direction and strength of the economy the credit and equities markets are predicting diffferent futures. Equity indicies are at or near record highs while Treasury interest rates have fallen sharply in the last two weeks normally a harbringer of a weaker economy. 


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Chart: Bloomberg



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