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Bad to worse: US economy shrank more than expected in Q1

The U.S. economy contracted at a much steeper pace than previously estimated in the first quarter, but there are indications that growth has since rebounded strongly.

The Commerce Department said on Wednesday gross domestic product fell at a 2.9 percent annual rate, the economy's worst performance in five years, instead of the 1.0 percent pace it had reported last month.

While the economy's woes have been largely blamed on an unusually cold winter, the magnitude of the revisions suggest other factors at play beyond the weather. Growth has now been revised down by a total of 3.0 percentage points since the government's first estimate was published in April, which had the economy expanding at a 0.1 percent rate.

The difference between the second and third estimates was the largest on records going back to 1976, the Commerce Department said. Economists had expected growth to be revised to show it contracting at a 1.7 percent rate. Sharp revisions to GDP numbers are not unusual as the government does not have complete data when it makes its initial and preliminary estimates.

The latest revisions reflect a weaker pace of healthcare spending than previously assumed, which caused a downgrading of the consumer spending estimate. Trade was also a bigger drag on the economy than previously thought. The economy grew at a 2.6 percent pace in the final three months of 2013. With the first quarter in the rear view and the April-June period looking stronger, investors are likely to ignore the report.

Data such as employment, manufacturing and services sectors point to a sharp acceleration in growth early in the second quarter. However, the pace of expansion could fall short of expectations, which range as high as a 3.6 percent rate. Economists estimate severe weather could have slashed as much as 1.5 percentage points from GDP growth in the first quarter. The government, however, gave no details on the impact of the weather.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 1.0 percent rate. It was previously reported to have advanced at a 3.1 percent pace. Exports declined at a 8.9 percent rate, instead of 6.0 percent pace, resulting in a trade deficit that sliced off 1.53 percentage points from GDP growth. Weak export growth has been tied to frigid temperatures during the winter.

Businesses accumulated $45.9 billion worth of inventories, a bit less than the $49.0 billion estimated last month. Inventories subtracted 1.70 percentage points from first-quarter growth, but should be a boost to second-quarter growth.

A measure of domestic demand that strips out exports and inventories expanded at a 0.3 percent rate, rather than a 1.6 percent rate.


Trucks loading with goods leave the port in New Jersey.
Justin Solomon | CNBC
Trucks loading with goods leave the port in New Jersey.

Durables tumble by more than expected

A separate report showed orders for long-lasting U.S. manufactured goods unexpectedly fell in May, suggesting an anticipated rebound in growth this quarter could fall short of expectations, even as a measure of business capital spending plans rose.

The Commerce Department said durable goods orders declined 1.0 percent as demand for transportation, machinery, computers and electronic products, electrical equipment, appliances and components, and defense capital goods fell.

Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, increased by a revised 0.8 percent in April, when they were boosted by defense equipment.

Economists polled by Reuters had forecast orders being flat last month after April's previously reported 0.6 percent gain.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.7 percent after declining by a revised 1.1 percent in April.

Economists had expected orders for these so-called core capital goods to increase 0.5 percent after April's previously reported 1.2 percent fall.

The increase in core capital goods points to some pick-up in business spending, which should support second-quarter growth.

While the economy has rebounded from its winter-induced slump in the first quarter, data such as retail sales and housing starts suggest growth could fall short of expectations. Growth forecasts range as high as a 3.6 percent annual pace. The economy shrunk at a 2.9 percent rate in the first quarter.

Core capital goods shipments rose 0.4 percent last month. Shipments of core capital goods are used to calculate equipment spending in the government's GDP measurement. They had declined 0.4 percent in April.

Last month, orders for transportation equipment fell 3.0 percent as bookings for civilian aircraft fell 4.0 percent. Automobile orders increased 2.1 percent. Orders excluding transportation slipped 0.1 percent after rising 0.4 percent the prior month.

--By Reuters