U.S. economy shrinks 1% in first quarter

The U.S. economy was battered even more than first suspected by the harsh winter, actually shrinking from January through March. The result marked the first retreat in three years, but economists are confident the downturn was temporary.

Gross domestic product contracted at an annual rate of 1 percent in the first quarter, the Commerce Department said Thursday. That was worse than the government's initial estimate last month that GDP during the period grew by a slight 0.1 percent. The economy last posted a decline in the first three months of 2011 when it dropped 1.3 percent.

This year's weakening reflected slower stockpiling by businesses, a cutback in business investment and a wider trade deficit. Economists expect a robust rebound in the April-June quarter as the country shakes off the effects of a severe winter.

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DanGreenhaus, chief strategist atBTIG, called the drop in growth "backward looking."

"We knew that weather dramatically impacted growth in the first quarter, and we fully expect a bounce back in the second quarter," he said in a note to clients.

Indeed, there are a number of recent signs pointing toward a strengthening economy. The government released a separate report Thursday that showed applications for unemployment benefits, a proxy for layoffs, fell by 27,000 last week to 300,000. The result is nearly a seven-year low.

IanShepherdson, chief economist at Pantheon Macroeconomics, said that the big drop in unemployment benefit applications was more significant than the latest GDP figure because "it strongly support the idea that thelabormarket conditions are improving markedly, despite the weak headline growth during the winter."

The report Thursday was the government's second look at first quarter GDP, the country's total output of goods and services.

Reasons for contraction

The data primarily reflected a sharp slowdown in businesses stockpiling, which subtracted 1.6 percentage points from growth, a full percentage point more than the initial estimate. The trade deficit was slightly larger than previously thought. Business investment in structures fell at an annual rate of 7.5 percent in the first quarter, also worse than the initial estimate.

The 1 percent decline in the first quarter was only the second negative quarterly GDP reading since the current recovery began in June 2009. In the fourth quarter, the overall economy had grown at an annual rate of 2.6 percent.

While one definition of a recession is two consecutive quarters of contraction in GDP, there is no concern that a negative reading in the first quarter is a sign the economy is about to topple into a downturn. The widespread belief among analysts is that the weakness in the first quarter was based on a variety of temporary factors that will be quickly reversed once the weather warms up.

Rebound expected

Many economists estimate that GDP will post a sizable rebound to growth of around 3.8 percent in the current April-June quarter,fueledby pent-up demand. Analysts are also optimistic that growth will remain above 3 percent in the second half of this year, giving the economy the kind of momentum that has been lacking for much of the first five years of recovery from the country's worst recession since the1930s.

If growth does pick up, that should promote stronger hiring and help drive the unemployment rate down further. In May, employers added 288,000 jobs in the biggest hiring surge in two years. That helped push the unemployment rate down to 6.3 percent, its lowest point since 2008.

The economy is facing fewer hurdles this year than last year, when government spending cuts and higher taxes trimmed growth by an estimated 1.5 percentage points.

A government budget truce has also lifted, at least through the rest of this year, much of the uncertainty that had been weighing on the economy over the potential threats of further government shutdowns or market-rattling battles over raising the government's borrowing limit.