U.S. Recovery Stumbles Again as Economy Contracts in First Quarter

Economy

According to the U.S. Commerce Department for the first time since the first quarter of 2011, the U.S. economy has contracted. Although it is projected to be a temporary setback, the economic stumble represents a bleak start to the year. Government economists had originally projected an estimated 0.1 percent sluggish growth rate, and blamed the slow growth on the harsh winter weather, which proved costly to construction, retail and national transportation. However, the much worse than projected news that the gross domestic product (GDP) actually contracted at an annual rate of one percent came as a shock to both economists and Americans concerned with the state of the nation and a recovery that has been if not stagnant, plodding at best.

In response to this economic stumble, the dollar, as measured against 10 counterparts, fell which lent support to the Federal Reserve to continue record low interest rates on loans. Bloomberg Dollar Spot Index reported a drop of 0.1 percent while the Euro rose, 0.1 percent. However, foreign exchange traders are taking into account the harsh winter weather factor. In addition, chief currency strategist for Westpac Banking Corp of New York Richard Franulovich says he is a “dollar bull” and states that in the long-term U.S. growth looks “more secure than Europe.”

In response to the new GDP numbers, New York’s managing director of FX strategy at BMO Capital Markets in New York, Boris Schlossberg is of the mind that despite the bleak statistics and the economic stumble a “look under the hood” reveals a less grim picture. According to Schlossberg, inventories are in large part to blame for the contraction and “that bodes well for the future.” Joe Manimbo from Western Union Business Solutions in Washington seems to agree and suggests that in the future the view of the U.S. economy looks “much rosier” in light of current data on “durable goods and consumer confidence.” According to Manimbo, this data suggests that since the first quarter the U.S. economy has “rediscovered the gas pedal” and he expects to see an estimated three percent growth in the second quarter.

Nevertheless, it is unusual for an economy to contract when technically, it is not in a recession. This has given some economists a moment’s pause despite the optimism that the first quarter contraction is a temporary setback akin to a bump in the road to economic recovery.

An increase in retail sales, manufacturing and job growth is essential to economic growth and at a meeting in April of this year at the Federal Reserve the concept of “pent up demand” was floated in support of a better second quarter. However, the relationship between job growth and consumer demand is distinct and without the former, the latter will continue to suffer. The current statistics released by the Department of Labor showed a decrease in first-time applications for unemployment benefits. The numbers declined by 27,000 bringing the adjusted number of applications to 300,000 for the week. These numbers however, do not take into account those who have stopped looking for work and have dropped out of the system.

The first quarter economic contraction came as a surprise to both economic analysts and concerned Americans. However, if the weather did indeed play a large part in influencing retail sales, construction and consumer behavior the second quarter may show significant improvement and serve as an indication that the U.S. economy is on the road to recovery. Chief financial economist for the Bank of Tokyo-Mitsubishi UFJ in New York, Chris Rupkey expects 2014 will be a strong economic year stating that “Inventory levels will rebuild” and that he believes this will push the GDP to “nearly 4 percent in the second quarter.”

By Alana Marie Burke

Sources:

The Wall Street Journal
Reuters
Bloomberg
Chicago Tribune

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