Economy Shrinks for the First Time in Three Years

 

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GDP contracts 1 percent

For the first time in three years, the economy contracted in the first quarter due to a harsh winter according to a Reuter newswire report. However, economists say that it is rebounding and shows promise of 4 percent growth in the April-June quarter.

Last Thursday the Commerce Department slashed its estimate of gross domestic product to show that the economy shrank at an annual rate of 1.0 percent.

According to the report this was the worst performance since the first quarter of 2011. It reflected a far slower pace of inventory accumulation and a larger trade deficit than previously estimated.

Weather-related factors are expected to fade and inventories are expected to swing higher, which will boost the output in the current quarter.

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York said: “The race isn’t over yet for the economy. Things are better than you think. We are still expecting a strong finish to the year.”

The initial GDP estimates predicted a 0.1 percent growth rate. However, it is not unusual to see dramatic revision to GDP numbers from the government, as it does not have comprehensive data when it makes its initial estimates.

Reports from economists estimate that the severe weather could have been responsible for chopping off as much as 1.5 percentage points from GDP growth. The economy grew at a 2.6 percent pace in the fourth quarter of last year.

As investors focused on the brighter second-quarter growth prospects, U.S. stocks traded higher. Prices for U.S. Treasury debt rose, but the dollar fell against most competing currencies.

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