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 The government is expected to report on Friday that gross domestic
product shrank at a 0.8 percent annual rate instead of growing at
the 0.2 percent pace it estimated last month, according to a Reuters
survey of economists.
A larger trade deficit and a smaller accumulation of inventories by
businesses than previously thought will probably account for much of
the expected downward revision.
With growth estimates so far for the second quarter around 2
percent, the economy appears poised for its worst first half
performance since 2011.
Economists, however, caution against reading too much into the
expected slump in output. They argue the GDP figure for the first
quarter was held down by a confluence of temporary factors,
including a problem with the model the government uses to smooth the
data for seasonal fluctuations.
"The weakness in the U.S. recovery is not like a cart losing its
wheels because the labor market remains healthy and housing activity
is picking up," said Thomas Costerg, a U.S. economist at Standard
Chartered Bank in New York.
Several economists, including those at the San Francisco Federal
Reserve Bank, have cast doubts on the accuracy of GDP estimates for
the first quarter, which have tended to show weakness over the last
several years.
They argued the so-called seasonal adjustment is not fully stripping
out seasonal patterns, leaving "residual" seasonality. The
government said last week it was aware of the potential problem and
was working to minimize it.
The Commerce Department will publish its first-quarter GDP revision
on Friday at 8:30 a.m.
DOLLAR, ENERGY DRAG
Apart from the statistical quirk, the economy, which expanded at a
2.2 percent pace in the fourth quarter, was hammered by labor
disruptions at a major port. Also dragging on growth was a sharp
decline in investment spending in the energy sector as companies
such as Schlumberger <SLB.N> and Halliburton <HAL.N> responded to
the plunge in crude oil prices.
"The cutback in oil investment was bigger than what people thought
and the benefits through increased purchasing power for consumers
have not materialized," said Harm Bandholz, chief U.S. economist at
UniCredit Research in New York.
Economists estimate unusually heavy snowfalls in February chopped at
least one percentage point from growth.
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Trade was hit both by the strong dollar and the ports dispute, which
weighed on exports through the quarter and then unleashed a flood of
imports in March after it was resolved.
The GDP report is also expected to show a second quarterly drop in
corporate profits because of the dollar and oil prices.
While the economy has pulled out of its first-quarter stall, data on
retail sales and industrial production have suggested only a modest
pace of growth early in the second quarter. But reports on housing,
consumer confidence and business spending plans indicated momentum
could be building.
Unlike 2014, when growth snapped backed quickly after a dismal first
quarter, the dollar and investment cuts by energy companies continue
to hamstring activity.
But growth could accelerate as the year progresses.
Inventory is likely to be revised down from the lofty $110.3 billion
increase reported last month. That would suggest warehouses are not
bulging with unwanted merchandise and that business have latitude to
order more goods from factories.
Consumer spending, which accounts for more than two-thirds of U.S.
economic activity, could also finally get a lift from the
considerable savings households amassed because of cheaper gasoline.
The dollar rally has faded and the greenback is about 4 percent off
its peak in March, easing pressure on U.S. exporters. In addition,
rig counts suggest the energy investment rout is nearing its end.
"As temporary factors fade in importance, fundamentals will reassert
themselves," said Ben Herzon and economist at Macroeconomic Advisers
in St. Louis, Missouri.
(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Steve
Orlofsky)
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