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 The Commerce Department said on Wednesday gross domestic product
fell at a 2.9 percent annual rate, the sharpest decline in five
years, instead of the 1.0 percent pace it had reported last month.
"It's a scary report. It sounds worrisome, but keep in mind job
growth is running 200,000 each of the last four months, so we aren't
just whistling in the dark in our optimism over the outlook," said
Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi
UFJ in New York.
The economy was held back by an unusually cold winter, the
expiration of long-term unemployment benefits and cuts to food
stamps, which curbed consumer spending. It was also weighed down by
a slowdown in the pace of restocking by businesses.
All these temporary factors have since faded, lifting growth early
in the second quarter.
The government's gauge of first-quarter growth has been lowered by
3.0 percentage points since the first estimate in April showed the
economy expanded at a 0.1 percent rate, and revision between the May
and June release was the largest on records going back to 1976.
Economists had expected the revision to show the economy shrinking
at a rate of only 1.7 percent. Given the sharp downgrade, growth
this year could struggle to reach 2 percent.
Investors shrugged off the weak data and bought U.S. stocks. Prices
for U.S. Treasury debt were up at mid-day, while the dollar was
marginally weaker against a basket of currencies.
The latest GDP revision reflected a weaker pace of healthcare
spending than previously assumed, which led to a cut in the figure
for consumer spending to show the slowest rise since the fourth
quarter of 2009. Trade was also a bigger drag on the economy than
previously thought.
ACTIVITY PICKING UP
The economy grew at a 2.6 percent pace in the final three months of
2013, and second-quarter growth estimates range as high as a 4.0
percent rate. The lofty growth expectations were supported by other
data on Wednesday showing activity in the services sector hitting a
4-1/2 year high in June.
While a decline in bookings for defense capital goods and civilian
aircraft sank orders for long-lasting U.S. manufactured goods in
May, according to a third report, businesses spending plans
rebounded from April's slump. That suggested a steady pick-up in
business investment, a crucial ingredient for sustained economic
growth.
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There were also increases in order backlogs and inventories.
"Outside the defense realm, orders are moving up, shipments are
moving up, and inventory gains are returning. That is the precise
recipe for production and job gains," said Michael Montgomery, a
U.S. economist at IHS Global Insight in Lexington, Massachusetts.
In the first quarter, growth in consumer spending, which accounts
for more than two-thirds of U.S. economic activity, was lowered to a
1.0 percent rate from a 3.1 percent pace.
Exports fell at a 8.9 percent rate, the biggest drop in five years,
instead of a 6.0 percent pace. That resulted in a trade deficit that
sliced off 1.53 percentage points from GDP growth.
Other drags to first-quarter growth included a slow pace of
inventory accumulation, a sharp drop in investment in
non-residential structures such as gas drilling, and weak government
spending on defense.
Businesses accumulated $45.9 billion worth of inventories, a bit
less than the $49.0 billion estimated last month and well below the
fourth quarter pace. Inventories subtracted 1.70 percentage points
from first-quarter growth, but should be a boost to second-quarter
growth
A measure of domestic demand that strips out exports and inventories
expanded at a 0.3 percent rate, the weakest pace in three years,
rather than 1.6 percent as reported a month ago.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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