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US Economy Contracts in First Quarter

May 29, 2015
Higher imports, lower inventory investment, lower intellectual property investment and weaker services spending led to the drop after predictions for a small gain.

The economy opened the year with a relative thud, the government reported Friday, thanks to an annualized 0.7% drop in real gross domestic product during the first quarter. The Commerce Department had initially predicted an increase of 0.2%.

The downward revision was the result primarily of higher imports, lower inventory investment, lower intellectual property investment and weaker services spending. But that headline statistic isn’t as frightening as it might otherwise be thanks to solid reports across the rest of the economy: Residential investment was revised upward from 1.3% to 5.0%, as was equipment investment from 0.1% to 2.7%.

“The contraction was broadly anticipated with the revisions coming precisely where we anticipated them, with some of it related to transitory factors during the quarter,” TD Bank Group senior economist Michael Dolega said. “Other than the anticipated downward revisions, the upward revisions to investment are an encouraging sign.”

These numbers do, however, still underscore the economy’s apparent struggles to generate continued momentum after an annualized growth of 4.6% during the second quarter of 2014.

“At this point, given the continued drag from oil and gas drilling activity, and lower inventory investment, we expect the second quarter growth to remain subdued, at about 1.5% or 2%,” Dolega said. “As these factors wane, the economy should get back on its more robust growth path, generating near 3% growth in the second half of 2015.”

Overall, trade had a negative 1.9% impact on gross domestic product. Exports fell 7.6% in the quarter, after growing 4.5% the previous period. Meanwhile, imports rose 5.6%, just over half the pace of the previous quarter.

"This was a disappointing start to the new year," National Association of Manufacturers chief economist Chad Moutray said. "That is particularly true when you look at the optimism that so many businesses had at the start of 2015. Yet, it is clear that manufactures faced a number of significant headwinds that combined to slow the growth of demand and production."

The annual revision of the national income and product accounts will be released with the 2015 second-quarter GDP estimate on July 30.

In related news, India posted annual growth of 7.3%, helped out by a 7.5% economic increase during the first quarter of this calendar year (the fourth quarter of the country's financial year). The Swiss economy contracted by 0.2% during the first quarter, according to its national statistics agency, with some analysts predicting a brief recession as a result of the franc’s appreciation and its effect on the export sector. Production in the South Korean mining, manufacturing, electricity and gas industries fell by a seasonally-adjusted 1.2% after Statistics Korea predicted a drop of 0.3%.

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