|05-30-2015, 01:40 AM||#1|
U.S. economy contracts in first quarter dollar hurts corporate profits
The U.S. economy contracted in the first quarter as it buckled under the weight of unusually heavy snowfalls, a resurgent dollar and disruptions at West Coast ports, but activity already has rebounded modestly.
The government on Friday slashed its gross domestic product estimate to show GDP shrinking at a 0.7 percent annual rate instead of the 0.2 percent growth pace it estimated last month.
A larger trade deficit and a smaller accumulation of inventories by businesses than previously thought accounted for much of the downward revision. There was also a modest downward revision to consumer spending.
With growth estimates for the second quarter currently around 2 percent, the economy appears poised for its worst first-half performance since 2011. The economy's recovery from the 2007-2009 financial crisis has been erratic.
Weak data on consumer sentiment and factory activity in the Midwest on Friday suggested that while the economy has pulled out of its first-quarter soft patch, the growth pace was modest early in the second quarter. That mirrored other recent soft data on retail sales and industrial production.
But reports on housing and business spending plans have indicated momentum could be building, which would keep the Federal Reserve on track to raise interest rates later this year.
Economists caution against reading too much into the slump in output. They argue the GDP figure for the first quarter was held down by a confluence of temporary factors, including a problem with the model the government uses to smooth the data for seasonal fluctuations.
Economists, including those at the San Francisco Federal Reserve Bank, have cast doubts on the accuracy of GDP estimates for the first quarter, which have tended to show weakness over the last several years.
They argued the so-called seasonal adjustment is not fully stripping out seasonal patterns, leaving "residual" seasonality. The government said last week it was aware of the potential problem and was working to minimize it.
"Obviously the economy is weaker than we would like it to be, but the first quarter overstates that," said Robert Dye, chief economist at Comerica in Dallas. "We're going see enough growth to keep job creation in place and allow the Fed to maintain their lift-off schedule for September."
When measured from the income side, the economy expanded at a 1.4 percent rate in the first quarter. A measure of domestic demand growth was revised up slightly and business spending on equipment was much stronger than previously estimated, taking some edge off the slump in output.
U.S. Treasuries were trading higher, while the dollar was largely unchanged against a basket of currencies. Stocks on Wall Street fell.
DOLLAR, ENERGY DRAG
Apart from the statistical quirk, the economy, which expanded at a 2.2 percent pace in the fourth quarter, was hammered by a sharp decline in investment spending in the energy sector as companies such as Schlumberger (SLB.N) and Halliburton (HAL.N) responded to the plunge in crude oil prices.
Spending on mining exploration, shafts and wells plunged at a 48.6 percent pace in the first quarter, the largest drop since the second quarter of 2009.
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