Economy Shrank More than Reported in 1st Quarter

The US Commerce Department this week revised its reading on the US economy in the first quarter, reporting an annual GDP contraction of 2.9 percent, nearly triple the initially reported 1.0 percent decline. The 2.9 percent annual contraction rate is the worst for the world’s largest economy in five years and one of the worst non-recession quarterly performances ever. Economists were taken aback by the report, for the most part, but fell short of reversing their mostly optimistic outlooks for the economy moving forward. A variety of other recent indicators have pointed to an economy gaining steam, as job growth has picked up in recent months and the housing sector has showed numerous positive signs.

When the Commerce Department reported last month that the economy had shrunk at a 1 percent annual rate, the reading fell short of the expectations of most economists. The decline was expected due to a variety of factors including extreme winter weather that kept home sales in check in the Northeast. Other reasons for the pessimistic forecasts included a slowdown in inventory stockpiling by businesses and cuts to unemployment insurance and the food stamps program that fueled lower consumer spending. All of these factors have diminished or disappeared by now, however, so economists expect GDP growth to have picked up steam in the current quarter that ends next week. Early predictions have second-quarter growth reaching as high as a 4 percent annual rate of expansion, and few revisions were made to estimates based on Commerce’s latest reading. A separate report issued Wednesday further validated that optimism, showing the most growth in the services sector in nearly five years. A third report issued this week showed that businesses have resumed inventory building.