US Economy Shrinks 1%

After growing 3.2% in the last three months of 2013, the US economy has retracted in the first quarter of this year thanks to extreme weather conditions

Emma Wall 29 May, 2014 | 4:32PM
Facebook Twitter LinkedIn

The US economy has retracted. Primarily reflecting a downward revision to private inventory investment, the Commerce Department released a report on Thursday showing that US gross domestic product decreased in the first three months of 2014.

The report showed that GDP decreased by 1.0% in the first quarter compared to the initial estimate for a 0.1% uptick. Economists had been expecting the revised data to show a somewhat smaller contraction of about 0.5%.

While some economists are holding the retraction up as proof that the wheels are coming off the post-recession recovery in America, James Dowey of Neptune expected the first quarter growth figure to be disappointing due to the extreme weather experienced across the country in January and February.

By creating a measure of the weather called heating degree days, Dowey and his team found that the weather was negatively correlated with job growth across state; the economy suffered in the regions where the weather was worst.

Speaking in March Dowey said: “We found that it was totally feasible that bad economic data could be down to the weather. There has been geographical divergence over the last month as Florida and Texas begin to pick up.”

Following the announcement of the disappointing data, US stock markets fell – with the S&P 500 losing five points. But the index has already begun to climb again and recover the points it lost, as it verifies little can derail this rally.

The stock market has proved remarkably resilient to negative economic and political events. Last October U.S. politicians failed to reach a budget agreement and as a result of that we had the government shutting down. At the same time, the U.S. was coming up towards its debt ceiling; the point at which you can't allow debt to raise any further.

But despite these threats, US equities continued to climb – and the S&P 500 was the best performing index of 2013.

In other news, pending home sales in the US increased for the second consecutive month in April, according to a report released by the National Association of Realtors on Thursday, although pending sales rose by much less than economists had anticipated.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Emma Wall  is former Senior International Editor for Morningstar