US economy likely shrank in 1st quarter but rebound expected

May 28, 2015, 9:06 PM
In this photo made on Thursday, Feb. 12, 2015, a man welds parts in fans for industrial ventilation...
In this photo made on Thursday, Feb. 12, 2015, a man welds parts in fans for industrial ventilation systems at the Robinson Fans Inc. plant in Harmony, Pa. On Friday, the government will likely say the economy shrank in the January-March quarter for a second straight year, but steady job gains are widely expected to propel modestly healthy growth for the rest of 2015. (AP Photo/Keith Srakocic)
(AP Photo/Keith Srakocic)

WASHINGTON (AP) — A brutal winter, plunging investment by energy companies and a widening trade gap likely combined to shrink the U.S. economy at the start of the year. But the slump is expected to prove short-lived.

The government on Friday will issue its second of three estimates of the economy’s performance, as measured by the gross domestic product, in the January-March quarter.

Economists surveyed by data firm FactSet predict that the government will say GDP shrank at an annual rate of 0.8 percent last quarter. That would be much weaker than its first estimate: 0.2 percent annual growth.

Though falling GDP can be a sign of a recession, economists see little cause for concern. They are forecasting solid GDP growth the rest of the year, with steady job gains propelling the economy.

A harsh winter is gone. So is a labor dispute that slowed trade at West Coast ports. Home sales and construction are rebounding. Business investment is picking up.

Many economists also suspect that the government’s calculations have tended to underestimate growth in the first quarter of each year.

Some sectors of the economy do remain subpar. Energy drillers, for example, have been damaged by persistently low energy prices and are still cutting jobs and slowing production. The rise in the dollar is still making U.S. manufactured goods pricier overseas.

Yet the outlook has brightened considerably since winter. Most economists expect lower gas prices eventually to accelerate consumer spending, the main fuel for the economy.

Analysts generally foresee the economy growing at an annual rate of 2 percent to 2.5 percent in the current April-June quarter, with further strengthening later in the year.

A GDP decline in the first quarter would be the first since the economy shrank by an even sharper 2.1 percent annual rate in the first quarter of 2014. That quarter, too, was depressed in part by a bleak winter, which kept many consumers home and some businesses closed.

The expected slump this year is occurring in part because economists think the U.S. trade deficit — the gap between the value of exports and the larger value of imports — will be worse than first estimated.

The stronger dollar hasn’t only made U.S.-produced goods more expensive overseas. It’s also made imports cheaper for U.S. consumers. That combination produces a wider trade gap, which slows growth.

Some also think business stockpiling didn’t bolster growth last quarter as much as first estimated.

“We got hit with a double-whammy in the first quarter,” said Sung Won Sohn, an economics professor at California State University, Channel Islands. “We had a lot of adverse factors, from the harsh weather and consumers unwilling to spend their gas savings to a stronger dollar and weak economies overseas making the trade deficit larger.”

So far, most consumers haven’t used their gasoline savings to spend much more on other goods and services. The average U.S. pump price reached $2.03 a gallon in January, the lowest level in eight years. Though the average has risen back to $2.74, according to AAA, that’s still nearly a dollar below its point a year ago.

“Even with the recent rise in gas prices, they are still well below the levels of a year ago, and eventually consumers will start spending those savings,” said Joel Naroff, chief economist at Naroff Economic Advisors. “We are already seeing gains in restaurant sales.”

Analysts also say that steadily solid hiring, which has helped cut the unemployment rate to a seven-year low of 5.4 percent, will continue to put money in more people’s hands and fuel spending gains.

Some of the first quarter weakness may be revised away by government statisticians, who are studying whether their methods for making seasonal adjustments tend to overstate slowdowns during winter. The Bureau of Economic Analysis has said some adjustments will be reflected in the annual updates to economic growth it will issue in June.

Mark Zandi, chief economist at Moody’s Analytics, said he expects growth to reach an annual rate of around 3.5 percent in the second half of the year on the strength of job growth and consumer spending. For the full year, Zandi foresees growth of around 2.5 percent, roughly equal to last year’s 2.4 percent.

Before the first quarter pullback, many economists had thought growth for the full year might hit 3.5 percent. That would have been the best showing in a decade and evidence that the economy had broken out of the subpar pace that’s marked the first six years of the recovery.

Still, Zandi said he thinks “we are on track to get to full employment”– a roughly 5 percent jobless rate — “by this time next year, something we haven’t seen in a decade.”

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US economy likely shrank in 1st quarter but rebound expected