A Shrinking Economy in the First Quarter

Guest Post by Director Greg Kyle

The second estimate of U.S. GDP showed the economy contracting in the first quarter for the first time in three years. In the quarter, gross domestic product declined at a 1.0% annual rate (see chart below). This follows the earlier "advanced" estimate which had the economy barely growing at 0.1%.

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It is unlikely that the U.S. is heading for another recession as much of the contraction could be attributed to the harsh winter most of the U.S. experienced in the first part of the year. Frigid temperatures and snow slowed down business investments (investment in nonresidential structures), which declined 7.5% in the quarter. A downturn in exports and a decrease in private inventory investment also contributed to the economic contraction. On a positive note, consumer spending - which accounts for two-thirds of GDP - grew more than initially estimated in the quarter. Bad weather apparently did not manage to keep consumers out of stores, as personal consumption expenditures grew at a 3.1% annual rate.

The economy is likely to bounce back in the second quarter as consumer demand continues to remain solid and various indicators show business investments growing and inventories being restocked again in anticipation of continued demand and an uptick in exports. Even with an expected bounce back in this quarter and expectations of continued economic growth through the rest of this year, the current economic recovery, four years after one of the worst recessions since the Great Depression, is still quite anemic compared to other periods of economic expansion (see chart below).

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