U.S. economy stalls dramatically in first quarter


A slowdown in the housing market during the first quarter restrained the country's economic growth. (Photo by Larry Downing / Reuters)

The U.S. economy stalled during the first three months of the year, according to government data released Wednesday, failing to meet even modest expectations for growth, which could renew concerns over the sustainability of the recovery.

The nation's gross domestic product expanded at a meager 0.1 percent annual rate in the first quarter -- well below the forecasts for 1.2 percent growth. The slowdown reflected weaker exports, a decline in business investment and cuts in state and local government spending, among other things. The recovery was propped up by strong consumer spending, driven in part by health-care spending after the implementation of the Affordable Care Act.

gdp-q1-2014

The Commerce Department, which releases the data, emphasized that the numbers are preliminary. The government will revise the data twice more as additional information is collected. Economists had already trimmed their expectations for growth during the quarter in the face of this year’s brutally cold winter. Many believe the slowdown is only temporary and that the recovery will enjoy a bounceback through the spring.

"This is not a weak economy," said Paul Ashworth, chief U.S. economist at Capital Economics. "This is an economy that had two bad months because of the weather and got back to normal in March."

The major U.S. stock indexes opened in the red Wednesday. By late morning, the tech-heavy Nasdaq was down slightly, while the broader Standard & Poor's 500 was slightly above flat. The blue-chip Down Jones Industrial Average was up 0.12 percent.

Ashworth  predicts that growth in the second quarter will pick up to an annual rate of 3.5 percent before settling down to 3 percent for the year. Private data released Wednesday morning by human resources firm ADP showed the country added 220,000 jobs in April --better than analysts had anticipated. The government's official tally of job creation is slated for release Friday.

"The job market is gaining strength," said Mark Zandi, chief economist at Moody's Analytics, which calculates the ADP report. "After a tough winter, employers are expanding payrolls across nearly all industries and company sizes."

But there are concerns that the dismal report could signal more fundamental weakness in the economy. In particular, the real estate market has softened as rising prices and higher mortgage rates have made homes less affordable. New home sales were below expectations in March, while pending home sales plunged that month.

But data released Tuesday suggested the increase in home prices may be moderating. According to the S&P/Case-Shiller index, prices were up 13 percent for the 12 months ending in February in 20 major cities, a slower pace than in January. That could be good news for buyers.

"Home sales will pick up in the near term as the labor market continues to improve, consumer confidence increases, and lenders gradually ease their standards for mortgages," PNC Financial Services Chief Economist Stuart Hoffman said in a note to clients. "This will more than offset the drag on affordability from higher mortgage rates."

 

The Federal Reserve is slated to weigh in on the economy Wednesday afternoon in an official statement following its two-day policy meeting in Washington. The nation’s central bank had characterized growth during the first quarter as "slowing," in part due to the weather. It also noted the housing market had cooled off, though Fed Chair Janet Yellen later said the sector has turned a corner.

The Fed's assessment of the strength of the recovery will be a critical factor in how quickly it removes support for the economy. Since the beginning of the year, the Fed has been steadily reducing the amount of money it is pumping into the recovery and is expected to announce another cut of $10 billion on Wednesday. That program will likely end altogether in the fourth quarter, but the weak GDP reading has the potential to complicate those plans.

The Fed is also debating when it should raise its benchmark short-term interest rate, which has been at zero since 2008. Increasing the rate would be a sign that the central bank is confident that the economy can stand on its own. The Fed said it would consider the health of the labor market and inflation expectations in determining the right moment to make a change.

More business news:

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Small businesses — the nation’s job engine? Not lately.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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