U.S. economy shrank in first quarter

WASHINGTON – 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.

Dan Greenhaus, chief strategist at BTIG, 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.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the big drop in unemployment benefit applications was more significant than the latest GDP figure because “it strongly supports the idea that the labor market conditions are improving markedly, despite the weak headline growth during the winter.”

Other analysts noted that consumer spending, which accounts for 70 percent of economic activity, was very strong in the first quarter, growing at an upwardly revised 3.1 percent annual rate.

The White House, which is counting on a strong economy to lift Democratic fortunes in the fall elections, stressed that first quarter activity had been held back by temporary factors and that the economy was poised to rebound strongly.

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

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. Analysts noted that the weaker inventory figure would likely translate into more restocking and stronger growth in the second quarter.