U.S. First-Quarter GDP Revised to 0.2% Contraction

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The FINANCIAL — The economic slowdown early this year was less severe than previously estimated, putting the U.S. on a trajectory for stronger growth later in 2015, according to Nasdaq.

Gross domestic product, the broadest sum of goods and services produced across the economy, contracted at a 0.2% seasonally adjusted annual rate in the first quarter, the Commerce Department said on June 24. The agency previously estimated output fell 0.7% from January through March.

Economists surveyed by the Wall Street Journal had forecast a 0.2% contraction.

The revision showed consumer spending was stronger than previously estimated and that firms stocked up more on inventory.

Still, the data continues a familiar pattern in the current expansion, in which several quarters of impressive growth are upended by a significant slowdown. The latest reading marks the fifth time in the six-year old recovery when the economy failed to achieve at least a 1% growth rate for a quarter.

GDP measures have been difficult to read recently due to large revisions. Initially the government said the economy advanced at 0.2% pace last quarter. The figure was revised down last month to 0.7% contraction before being recast again Wednesday. Further revisions are possible in July when the Commerce Department issues its annual revisions alongside its first read of second-quarter output.

Underlying figures in Wednesday’s report point to the possibility of stronger economic growth later in the year.

Consumer spending, representing more than two-thirds of economic output, grew at a 2.1% rate in the first quarter, replacing the previous estimate of 1.8%. While the new reading is a slowdown from the fourth quarter’s 4.4% pace, upwardly revised outlays suggest consumers have the ability drive the expansion later in the year. Stronger wage growth and lower gasoline prices compared to a year ago should support spending.

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The revised data showed Americans spent more than previously estimated on food and beverages and transportation services.

Spending on home building and improvements advanced at a 6.5% pace, compared to a previous reading of a 5% increase. In the fourth quarter, fixed residential investment grew at a 3.8% rate. Home construction figures could be even stronger in the second quarter and beyond. Sales of both new and existing homes are at their highest levels in more than five years.

Companies also spent more on restocking their shelves. The change in private inventories added 0.45 percentage point to from overall growth, versus a previous reading of a 0.33 percentage point contribution. Increased inventories could be a sign businesses expect stronger demand later in the year. But if that demand doesn’t materialize, firms may need to cut output to adjust.

The GDP report did highlight several areas of concern.

Business investment–reflecting spending on construction, machinery, and research and development–fell at a 2% pace. While that was a less severe decline than the prior estimate, it was still the worst reading for the category since 2009. Other recent data shows manufacturers have continued to struggle through the first half of the year.

A sharp slowdown in the previously booming energy sector is weighing on output. And factories are facing headwinds from a strong dollar that makes U.S.-made goods relatively more expensive overseas.

Exports declined 5.9% from January through March, versus a previous estimate of a 7.6% decline. Exports of goods fell by 11.6%. Imports, which subtract from GDP, rose at a 7.1% pace last quarter, compared to a prior estimate of a 5.6% increase.

Government spending fell 0.6% in the first quarter, versus a prior estimate of a 1.1% decline.

Broadly, economists expect the economy will strengthen later in the year, but it remains to be seen if growth can breakout of its about 2% pattern recorded for most of the economic expansion that began in mid-2009. Even a rebound to a 3% growth rate in the second quarter would still result in a sluggish expansion for the first half of the year.

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Federal Reserve officials forecast the economy to grow between 1.8% to 2.0% all this year, according to projections released earlier this month. That would represent a slowdown from the 2014 rate.

The Fed will carefully assess if the economy is gathering strength ahead of any move to raise short-term interest rates from near zero. Stronger job growth could support a first increase in September, but inflation remains weak and overall growth has been choppy.

The price index for personal consumer expenditures–the Fed’s preferred gauge for inflation–fell 2% in the first quarter from the final three months of last year. Core prices, which exclude food and energy costs, rose 0.8%.

Federal Reserve governor Jerome Powell said on Tuesday that there is a 50-50 chance that the economy will realize the necessary conditions to raise rates in September.

“If my forecast for the economy were to be realized–and that forecast includes significantly stronger growth than we realized in the first quarter of the year,” a rate increase could occur “potentially as soon as September,” he said.

Meanwhile, the Commerce Department report showed corporate profits for the quarter grew at a slightly slower pace that initially estimated. Profits after tax, without inventory valuation and capital consumption adjustments, grew 2.9% in the first quarter from the fourth quarter of 2014, replacing a prior estimate of a 3.1% gain. Profits were up 9% from a year earlier. The measure closely aligns with what companies report in earnings statements.


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