Goshen News, Goshen, IN

Business

June 25, 2014

Economy shrank in Q1

Contraction is expected to be temporary

WASHINGTON — The U.S. economy shrank at a steep annual rate of 2.9 percent in the January-March quarter as a harsh winter contributed to the biggest contraction since the depths of the recession five years ago. But the setback is widely thought to be temporary, with growth rebounding solidly since spring.

The first-quarter contraction reported Wednesday by the Commerce Department was even more severe than the 1 percent annual decline it had estimated a month ago. Besides the harsh winter, much of the downward revision reflected a drop in health care spending. Another factor was a bigger trade deficit than initially estimated.

Though such a sharp decline would typically stoke fears of another recession, analysts see it as a short-lived result of winter storms that shut factories, disrupted shipping and kept Americans away from shopping malls and auto dealerships. They say the economy is rebounding in the April-June quarter. Many expect growth to reach a robust annual rate of at least 3.5 percent this quarter.

Most analysts also foresee the economy expanding at a healthy rate of around 3 percent in the second half of this year.

Reports on consumer spending, manufacturing and business investment have shown a solid rebound this spring. Orders for big-ticket manufactured goods excluding military hardware and for core capital goods, a proxy for business investment, rose strongly in May, a report Wednesday showed.

"We have ample evidence that the first quarter was just a temporary setback for the economy, and we are climbing out of the hole in the current quarter," said Stuart Hoffman, chief economist at PNC Financial.

Last quarter's 2.9 percent annual decline in economic activity, as measured by the gross domestic product, followed a 2.6 percent gain in the fourth quarter. It was the weakest showing since the economy shrank at a 5.4 percent annual rate in the first quarter of 2009 in the midst of the Great Recession.

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