U.S. economy ekes out 0.1 per cent GDP growth

The U.S. economy slowed drastically in the first three months of the year as a harsh winter exacted a toll on business activity. The slowdown, while worse than expected, is likely to be temporary as growth rebounds with warmer weather.

Growth slowed to a barely discernible 0.1 per cent annual rate in the January-March quarter, the Commerce Department said Wednesday. That was the weakest pace since the end of 2012 and was down from a 2.6 per cent rate in the previous quarter.

Many economists said the government's first estimate of growth in the January-March quarter was skewed by weak figures early in the quarter. They noted that several sectors from retail sales to manufacturing output rebounded in March. That strength should provide momentum for the rest of the year.

And on Friday, economists expect the government to report a solid 200,000-plus job gain for April.

"While quarter one was weak, many measures of sentiment and output improved in March and April, suggesting that the quarter ended better than it began," said Dan Greenhaus, chief investment strategist at global financial services firm BTIG.

Policymaker concerns

Still, the anemic growth last quarter is surely a topic for discussion at the Federal Reserve's latest policy meeting, which ends Wednesday afternoon. No major changes are expected in a statement the Fed will release. But it will likely announce a fourth reduction in its monthly bond purchases because of the gains the economy has been making. The Fed's bond purchases have been intended to keep long-term loan rates low.

In its report Wednesday, the government said consumer spending grew at a 3 per cent annual rate last quarter. But that gain was dominated by a 4.4 per cent rise in spending on services, reflecting higher utility bills. Spending on goods barely rose. Also dampening growth were a drop in business investment, a rise in the trade deficit and a fall in housing construction.

The scant 0.1 per cent growth rate in the gross domestic product, the country's total output of goods and services, was well below the 1.1 per cent rise economists had predicted. The last time a quarterly growth rate was so slow was in the final three months of 2012, when it was also 0.1 per cent.

Ian Shepherdson, chief economist at Pantheon Marcroeconomics, said he expects the economy's growth to rebound to a 3 per cent annual rate in the current April-June quarter. Other economists have made similar forecasts.

A variety of factors held back first-quarter growth. Business investment fell at a 2.1 per cent rate, with spending on equipment plunging at a 5.5 per cent annual rate. Residential construction fell at a 5.7 per cent rate. Housing was hit by winter weather and by other factors such as higher home prices and a shortage of available houses.

A widening of the trade deficit, thanks to a sharp fall in exports, shaved growth by 0.8 percentage point in the first quarter. Businesses also slowed their restocking, with a slowdown in inventory rebuilding reducing growth by nearly 0.6 percentage point.

Government austerity

Also holding back growth: A cutback in spending by state and local governments. That pullback offset a rebound in federal activity after the 16-day partial government shutdown last year.

Economists say most of the factors that held back growth in the first quarter have already begun to reverse. Most expect a strong rebound in growth in the April-June quarter.

Analysts say the stronger growth will endure through the rest of the year as the economy derives help from improved job growth, rising consumer spending and a rebound in business investment.

In fact, many analysts believe 2014 will be the year the recovery from the Great Recession finally achieves the robust growth that's needed to accelerate hiring and reduce still-high unemployment. Many analysts think annual economic growth will remain around 3 per cent for the rest of the year.

If that proves accurate, the economy will have produced the fastest annual expansion in the gross domestic product, the broadest gauge of the economy's health, in nine years. The last time growth was so strong was in 2005, when GDP grew 3.4 per cent, two years before the nation fell into the worst recession since the 1930s.

A group of economists surveyed this month by The Associated Press said they expected unemployment to fall to 6.2 per cent by the end of this year from 6.7 per cent in March.

One reason for the optimism is that a drag on growth last year from higher taxes and deep federal spending cuts has been diminishing. A congressional budget truce has also lifted any imminent threat of another government shutdown. As a result, businesses may find it easier to commit to investments to modernize and expand production facilities and boost hiring.

State and local governments, which have benefited from a rebound in tax revenue, are hiring again as well.

Joel Naroff, chief economist at Naroff Economic Advisors, said he expects job growth to average above 200,000 a month for the rest of the year starting with the April jobs report, which will be released Friday.

"Those are the types of job gains which will generate incomes and consumer confidence going forward," Naroff said.