US economy stalls in Q1, inventories and trade weigh

Written by Reuters | Washington | Updated: May 1 2014, 02:18am hrs
US economyGross domestic product expanded at a 0.1 percent annual rate, the slowest since the fourth quarter of 2012. Reuters
The US economy barely grew in the first quarter as exports tumbled and businesses accumulated stocks at the slowest pace in nearly a year, but activity already appears to be bouncing back.

Gross domestic product expanded at a 0.1 percent annual rate, the slowest since the fourth quarter of 2012, the Commerce Department said on Wednesday.

That was a sharp pullback from the fourth quarter's 2.6 percent pace and was worse than economists' expectations for a slowdown to a 1.2 percent rate. The slowdown partly reflected an unusually cold and disruptive winter, marked by declines in sectors ranging from business spending to home building.

The Commerce Department's first snapshot of first-quarter growth was released just hours before the Federal Reserve wraps up a two-day policy meeting.

While harsh weather partially explains the weakness in growth, the magnitude of the slowdown could complicate the U.S. central bank's message as it sets to announce a further reduction in the amount of money it is pumping into the economy through monthly bond purchases.

U.S. stock index futures fell slightly on the report, while U.S. Treasury debt prices trimmed losses.

The first-quarter stall in growth, however, is likely to be temporary and recent data have suggested strength at the tail end of the quarter.

Separately, the ADP National Employment Report showed private employers added 220,000 jobs to their payrolls in April after increasing headcount by 209,000 in March.

"This weakness is not carrying through the second quarter," said Gus Faucher, senior economist at PNC Financial Services in Pittsburgh.

Economists estimate severe weather could have chopped off as much as 1.4 percentage points from GDP growth. The government, however, gave no details on the impact of the weather.


Businesses restocked inventories to the tune of $111.7 bln in the final three months of last year, but added only $87.4 billion more to stocks in the first quarter, the smallest amount since the second quarter of 2013.

The slowdown in restocking subtracted 0.57 percentage point from GDP growth in the first quarter.

Trade also undercut growth, taking off 0.83 percentage point, partly because of the weather, which left goods piling up at ports. Exports fell at a 7.6 percent rate in the first quarter, the largest decline in five years, after growing at a 9.5 percent pace in the final three months of 2013.

Together, inventories and trade sliced off 1.4 percentage points from GDP growth. A measure of domestic demand that strips out exports and inventories expanded at a 1.5 percent rate.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.0 percent rate, reflecting a spurt in spending on services linked to demand for heating during the winter and the Affordable Healthcare Act, which expanded health care coverage to many Americans.

Spending on services grew at its quickest pace since the second quarter of 2000.

Spending on goods, however, slowed sharply, indicating that the frigid temperatures had reduced foot traffic to shopping malls. Consumer spending had increased at a brisk 3.3 percent pace in the fourth-quarter.

Harsh weather also undercut business spending on equipment. While investment in nonresidential structures, such as gas drilling, rebounded, the increase was minor. Business spending on equipment fell at its fastest pace in nearly five years.

Investment in home building contracted for a second straight quarter, in part because of the weather. But a rise in mortgage rates over the past year has also hurt.

A second quarter of contraction in spending on home building suggests a housing recession, which could raise some eyebrows at the U.S. central bank. A bounce back is, however, expected in the April-June period.




"That is a big, big surprise. It's very big disappointment. There's weakness across the board. The housing we could tie largely to weather, but not so with equipment and business equipment. We know the trade was weak as with inventory. There's another subtraction in government. Weather was a big chunk of it, but that's all of it, which is concerning. Consumer spending was pretty solid, which is a positive.

"What the Fed might think is that this will be revised up. Everything else is showing us that the economy is picking up. This weakness is not carrying through the second quarter. I think the Fed will not read too much into it and will likely discount this number. The deflator and PCE are below what the Fed wants to see and that's a reason for them to keep the federal funds near zero into the second half of this year." ANNALISA PIAZZA, HEAD OF FIXED INCOME STRATEGIC RESEARCH, NEWEDGE STRATEGY, LONDON:

"The breakdown of the report shows a mixed picture across the main components. PCE was surprisingly strong in Q1, up by a robust 3 percent, led by a solid rebound in the services sector.

"All in all, today's GDP was clearly disappointing. However, some of the decline is clearly explained by adverse weather over the winter and will be reversed in the coming quarter. We rule out that the Fed will modify its policy outlook on the back of today's GDP report and the gradual tapering is set to continue in the coming months."


"We are seeing a rebound in job gains since the winter. We are optimistic about Friday's payrolls number. The employment indicator in yesterday's Conference Board consumer confidence was not supportive of a strong payroll number for April, however. I don't think we are going to see the Federal Reserve signaling anything about a rate increase based on the recent employment data because they were light in the beginning of the year. We have to see some stronger months ahead, and April will be one of those months for catch-up. The strength in the labor market is broadening. Construction jobs have been strong recently and governments have been adding more jobs after cutting them for a couple of years. The overall job gains will not change much what we have seen . But the quality of the jobs will be better than what we have seen which would be positive on overall wage gains,"


STOCKS: U.S. stock index futures are lower BONDS: U.S. bond prices generally higher, though long bond is 3/32 lower FOREX: Dollar is weaker against currency basket