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US Economy Contracts Sharply in Q1

The economy was hit by unusually severe winter weather in much of the country at the beginning of the year.

WASHINGTON - The U.S. economy shrank a steep 2.9% in the first quarter in its worst contraction in five years, the government said Wednesday, but more recent data signals a rebound.

The Commerce Department sharply revised downward its May estimate of a 1% contraction in the January-March period, saying there was weaker growth in consumer spending, a larger increase in exports and higher imports than previously known.

It was the steepest drop in drop in gross domestic product, measuring the nation's output in goods and services, since the 2009 first quarter's 5.4% plunge during the worst recession since the 1930s.

The economy was hit by unusually severe winter weather in much of the country at the beginning of the year that sapped momentum after growth of 2.6% in the 2013 fourth quarter.

But it did not suggest that the U.S. is slipping into recession, technically defined as two consecutive quarters of contraction, as second-quarter data has shown the economy rebounding.

Jim O'Sullivan, chief U.S. economist at High Frequency Economics, called the first-quarter report "an outlier."

"If anything, labor market indicators and business surveys are suggesting a net pick-up in the trend so far this year. We expect at least partial payback with a strong 4% rate of growth in Q2," O'Sullivan said.

Federal Reserve Shrugs

The Federal Reserve has shrugged off the weak first quarter as largely weather-related. A week ago the Fed cut, for the fifth time in a row, $10 billion from its economic stimulus program, bringing it to $35 billion a month.

The central bank said that economic growth had rebounded in recent months from the first quarter, but slashed its 2014 GDP growth forecast to 2.1% to 2.3%, down 0.7 points from its March estimate.

Still, conditions in the first quarter were much worse than thought. Analysts pointed to huge downward revisions to consumer spending and services, the main drivers of the world's largest economy.

Personal consumption expenditures growth was slashed to 1% from 3.1%, due in part to a cutback in health care spending.

Inflation Under Control

Inflation remained tame. The PCE price index, the Fed's preferred inflation measure, rose at an annual rate of 1.4%, well below 2% target.

Services, which account for about 90% of output, saw growth revised to 1.5% from 4.3%.

"This is not only a large revision but it's a large revision in the sector of the economy that tends to create jobs," said Robert Brusca of FAO Economics.

"While there are cuts to spending up and down the line, the biggest cuts came in consumption and are concentrated in services. Because of that we have to wonder if the prospects for job growth to remain solid are as strong as previously thought."

Job growth has topped 200,000 per month for the past four months but the unemployment rate, at 6.3%, remains elevated nearly five years after the recession ended.

Analysts said the economy already has put the bad first quarter in the rear-view mirror.

Since the recovery began in July 2009, the economy has grown about 2% per year and growth should accelerate to above 3% for the rest of 2014 and through much of 2015, said Scott Hoyt of Moody's Analytics.

"Although the economy hit a deep pothole in the first quarter, this outlook remains intact."

Sal Guatieri of BMO Capital Markets said second-quarter growth has rebounded in part because companies are more willing to spend, citing the May durable goods report released Wednesday showing new orders rose 4.2% from a year ago.

"The hefty Q1 setback suggests 2014 growth of around 1.7%, the worst annual performance since the recession. Brighter days lay ahead... barring another unforeseen shock."

Copyright Agence France-Presse, 2014

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