Economy shrank 2.9% in 1Q, worst drop since '09

Economy shrank 2.9% in 1Q, worst drop since '09

Credit: AP

Ryan Peterson prepares french fries at a Dick's Drive-In restaurant in Seattle in April 2014. (Photo: Ted S. Warren, AP)

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by Paul Davidson, USA TODAY

KREM.com

Posted on June 25, 2014 at 6:24 AM

The U.S. economy turned in its worst quarter in five years during the first three months of 2014, shrinking more sharply than previously estimated.

The nation's gross domestic product in the first quarter fell at a 2.9% annual rate vs. the 1% contraction previously believed, the Commerce Department said Wednesday. Economists surveyed by Bloomberg expected a 1.8% drop in output.

The decline was the sharpest since growth tumbled 5.4% in the first quarter of 2009 during the Great Recession. The last time the economy shrank was in the first quarter of 2011, slipping 1.3%.

The more dramatic drop was largely the result of weaker household consumption. Consumer spending increased just 1%, vs. the 3.1% gain previously estimated as health care spending dipped slightly. The government previously said that medical expenditures contributed substantially to growth as the Affordable Care Act began to cover more Americans.

Also, exports declined 8.9%, vs. the 6% drop previously estimated. And businesses replenished their stocks even more slowly than believed after aggressively adding to inventories late last year.

The larger than expected drop in output is not a harbinger of an economy headed back to recession or even softening. Many economists say much of the first-quarter weakness was the result of temporary factors, such as an unusually harsh winter weather. They expect growth to exceed 3% in the current quarter and the rest of the year.

Reports this week show that the housing market picked up last month after the dismal first-quarter, with new homes selling at the fastest pace since 2008 and existing home sales posting their largest increase in three years.

Job growth, consumer confidence and measures of manufacturing and service sector activity also have gained steam recently.

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