US first-quarter GDP revised to show slight contraction

Final first-quarter GDP dips 0.2 percent
Final first-quarter GDP dips 0.2 percent
GDP contracting slightly in Q1
GDP contracting slightly in Q1
Morgan Stanley's 2015 forecast & strategy
Morgan Stanley's 2015 forecast & strategy

The U.S. economy contracted slightly in the first quarter as it struggled with bad weather, a strong dollar, spending cuts in the energy sector and disruptions at West Coast ports.

There are signs, however, that growth is accelerating in the second quarter as the temporary drag from unusually heavy snowfalls and the ports dispute fade. Retailers reported strong sales in May and employers stepped up hiring. Housing is also firming.

The Commerce Department said on Wednesday gross domestic product fell at a 0.2 percent annual rate in the January-March quarter instead of the 0.7 percent pace of contraction it reported last month.

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A fairly stronger pace of consumer spending than previously estimated accounted for much of the upward revision. Consumer spending, which accounts for more than two thirds of U.S. economic activity, was revised up to 2.1 percent growth pace from the 1.8 percent rate reported last month.

With personal savings increasing at a robust $720.2 billion pace, consumer spending could accelerate in the second quarter.

While export growth was revised higher, that was offset by an upward revision to imports, leaving a still-large deficit that subtracted almost 2 percentage points from GDP.

The GDP revision was in line with economists' expectations. The economy expanded at a 2.2 percent rate in the fourth quarter.

But the first-quarter slump in output likely is not a true reflection of the economy's health. Economists, including those at the San Francisco Federal Reserve Bank, say a problem with the model the government uses to smooth the data for seasonal fluctuations also contributed to depressing the GDP number.

They have argued the so-called seasonal adjustment is not fully stripping out seasonal patterns, leaving "residual" seasonality. The government said last month it was aware of the potential problem and was working to address it when in publishes annual GDP revisions in July.

When measured from the income side, the economy expanded at a 1.9 percent rate in the first quarter instead of the previously reported 1.4 percent pace. A measure of domestic demand growth was revised up four-tenths of a percentage point to a 1.2 percent rate.

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Economists estimate unusually heavy snowfalls in February sliced off at least one percentage point from growth.

Estimates for spending on equipment were little changed. Business spending has been hurt by a strong dollar and lower energy prices.

Businesses accumulated slightly more inventories than previously estimated in the first quarter, which could mean they have little incentive to keep on adding to stock in the current quarter. The value of inventory accumulated in the first quarter was revised up to an increase of $99.5 billion from the $95 billion rise reported last month.

That meant inventories contributed 0.45 percentage point to GDP instead of the previously reported 0.33 percentage point. Inventories could be a drag on second-quarter GDP.

After-tax corporate profits were a bit weaker in the first quarter than previously thought. Profits after tax with inventory valuation and capital consumption adjustments were revised to show a 8.8 percent decline instead of the 8.7 percent drop reported last month.