The U.S. economy shrank at an annualized pace of 0.7 percent in the first three months of the year, according to government data released Friday morning, a tumble for a recovering nation that until recently seemed poised for takeoff.
The contraction, the country’s third in the aftermath of the Great Recession, provides a troubling picture of an economy that many figured would get a lift from cheap oil, rapid hiring and growing consumer confidence. Instead, consumers have proved cautious, and oil companies have frozen investment — all while a nasty winter caused havoc for transportation and construction and a strong dollar widened the trade deficit.
The numbers released Friday were a revision of earlier figures that had shown GDP growing in the first quarter at 0.2 percent. Markets had since expected the downward revision, in large part because of recent data showing the trade deficit at a 6½-year high.
Though the United States has shaken off nasty quarters in the past, including one year ago, this time the rebound doesn’t appear to be so dramatic. Halfway through the second quarter, economists say growth again appears to be below expectations. Many analysts expect the GDP to expand roughly 2 percent in the second quarter, while the Federal Reserve Bank of Atlanta takes an even darker view, predicting an expansion of just 0.8 percent. That would leave the United States with six months of economic standstill.
In 2014, the economy contracted 2.1 percent in the first quarter. But growth was rapid for the rest of the year, expanding 4.6 percent in the second quarter and 5 percent in the third.
“Really the interesting question is how much of this will bounce back,” said Jeremy Lawson, a chief economist at Standard Life Investments, an asset management firm. “My take is that activity will rebound more slowly than it did last year. Some of these downward pressures are more persistent than in the past.”
Those pressures include an oil price shock has stalled one of America’s best-performing sectors while forcing tens of thousands of layoffs and an appreciated dollar that makes U.S. exports pricier overseas, pinching profits of major domestic companies.
Remove the trade deficit, and the U.S. GDP grew 1.2 percent in the first quarter. Not since 1985 has trade so heavily dragged down growth. In the first quarters, businesses also pulled back on inventories, further cutting into growth.
Still, perhaps the biggest surprise of the past six months has been the muted pickup in consumer spending, which accounts for about two-thirds of the economy. Personal consumption grew 1.8 percent in the first quarter, but that’s well off the pace from the second half of 2014. Consumers, instead, have taken the money saved at the gasoline pump and used it to pay back debt or rebuild savings, according to government and credit card data.
The first-quarter figure will be revised once more, in June. Some of the sluggishness during the winter months was likely influenced by temporary factors, including a series of major snowfalls in the Northeast and a port strike on the West Coast.
Some economists also believe that the formula used to smooth out seasonal fluctuations has become unreliable and could be overstating the GDP slide. In terms of gross domestic income, another measure of the economy, growth stood at 1.4 percent in the first quarter.
Jason Furman, chairman of the White House’s Council of Economic Advisers, noted that over the last decade first-quarter GDP growth has averaged a “considerably slower pace” than the other three quarters. “First-quarter underperformance has tended to increase over the past ten years, in parallel with intensifying winter weather,” Furman wrote in a post on the White House Web site.
In a speech last week, Janet L. Yellen, chair of the Federal Reserve, said that growth would likely be “moderate” over the rest of the year. But she also said that the world’s largest economy remains on solid ground, largely because of strong hiring, gains in disposable income and cheap borrowing costs. As momentum picks up, the central bank is expected to raise interest rates, which have stayed near zero for 6½ years. That move could come in the second half of the year.
Even as the economy has slowed, the labor market has remained fairly strong, with companies hiring at a pace well above what has been seen for much of the recovery. Eventually, economists say, either hiring will slow to sync with GDP or the economy will catch up with job growth.
“But for now, it’s a bit of a puzzle,” said Carl Tannenbaum, chief economist at Northern Trust, a wealth management firm.