- FortuneUSA TODAY-A quarterly contraction in the economy can set off anxiety-ridden thoughts of recession. Take a breath and lighten up. The economy's 1% ...
A quarterly contraction in the economy can set off anxiety-ridden thoughts of recession.
First Take: Weak 1Q growth points to 2Q rebound
Take a breath and lighten up. The economy's 1% decline in the pace of growth last quarter will likely lead to a sharper bounce-back in the current quarter, economists say.
First of all, much of the shrinking economy was the result of sharply slower inventory-building by businesses, a development that was at least partly weather related. If not for the tepid stockpiling, the economy would have grown about 0.6% instead of contracting 1%.
Manufacturers try to match the parts they purchase and the products they make to anticipated sales. In the second half of last year, companies aggressively ramped up production and built up inventories, leading many economists to expect a snap-back effect in the first quarter.
But Jim O'Sullivan, chief U.S. economist of High Frequency Economics, says inventories matched up with sales pretty closely late last year. In the first quarter, meanwhile, final sales to consumers, business, governments and others were weak, rising 0.6%. But the increase in inventories was far weaker.
While the slowdown in part was payback for the aggressive stockpiling last year, O'Sullivan believes harsh winter weather halted factory production even more than it crimped sales. Many manufacturers, in fact, reported that snowstorms had shuttered factories.
As a result, manufacturers churned out far fewer widgets, even fewer than what was warranted by the modest sales activity. Auto dealerships, for example, had far fewer cars sitting on their lots in the first quarter than in October through December, the Commerce Department said Thursday.
Economists, in turn, expect manufacturers and retailers to build up their stocks in the current quarter more than they previously estimated to meet solid sales activity and to make up for the unexpectedly small additions in the first three months of the year.
Weather also impacted other sectors last quarter. Non-residential construction fell 7.5% and home building was down 5%.
And state and local government spending dipped 1.8%, vs. the 1.3% initially reported.
While not all of the declines can be chalked up to weather, much of it can be, economists say.
"The first-quarter contraction was quite obviously due to the unusually severe weather," says Paul Ashworth of Capital Economics.
And that means that construction of new homes and warehouses put off early this year is likely occurring in the current quarter.
O'Sullivan expects the economy to grow 4% in the second quarter, while many economists expect growth of 3% the rest of the year, up from the roughly 2% pace so far in the recovery.
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