US economy contracted in first quarter of 2014

US winter storms Unusually bad winter weather had contributed to the economic slowdown, the US Commerce Department said

The US economy shifted into reverse in the first three months of 2014 shrinking by an annualised rate of 1%, official estimates have shown.

It is the worst economic performance since the first quarter of 2011.

It is also a big fall on the 2.6% rise in economic output in the final quarter of last year.

The US Commerce Department's first reading of gross domestic product (GDP) showed the economy grew at an annualised rate of just 0.1%.

The fall in output was blamed on an unusually cold and disruptive winter - one of the coldest in the US for 20 years - and a plunge in business investment.

Analysis

Nobody thinks the US economy is slipping back into recession. Still it's a nasty reminder that instead of robust growth America's recovery is just ticking along.

Given the slow return to health, the recovery in American corporate profits since the financial crisis has been all the more remarkable. But has it finally peaked?

This release shows corporate profits fell 9.8% (non annualized) in the first three months of the year. There are plenty of reasons why they were squeezed, including the weather but it still bears watching.

Economists estimate the weather could have cost up to 1.5 percentage points of GDP.

However, the Commerce's Department's report did not estimate the effect of the winter weather.

Rebound

The fall was also twice as big as economists expected.

Most Wall Street analysts had forecast the economy to contract by around 0.5%.

But the Commerce Department said there was already evidence that the economy was rebounding, with data ranging from employment to manufacturing activity already pointing to a sharp acceleration in economic activity in the second quarter.

Tumbling exports, while not as severe as initially thought, combined with stronger imports in the first quarter resulted in a larger than expected trade deficit which shaved 0.95 percentage points off US economic output.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased by 3.1%, which was revised up slightly from 3% in the first estimate.

Port of Los Angeles America's trade deficit also worsened in the first quarter as imports rose

Business spending on non-residential structures, such as gas drilling, fell by 7.5%. It had previously been reported to have increased by 0.2% .

The report showed corporate pre-tax profits also plunged 13.7% in the first quarter, the biggest drop since the fourth quarter of 2008.

The White House said the GDP revision was subject to a number of notable influences, including the severe winter weather, which temporarily lowered growth.

It added: "The President will do everything he can either by acting through executive action or by working with Congress to push for steps that would raise growth and accelerate job creation, including fully paid-for investments in infrastructure, education and research, a reinstatement of extended unemployment insurance benefits, and an increase in the minimum wage."

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