U.S. economy not as bad in 1st quarter, paving way for rebound

The Commerce Department says that consumers stepped up their spending in May, and home sales are climbing — signs that the economy is back on track.

The U.S. economy contracted in the first three months of the year, just not as much as previously estimated. More recent data show that the weakness was largely temporary, with a rebound in the works for the April-June quarter.

The economy, as measured by the gross domestic product, shrank at a seasonally adjusted annual rate of 0.2 percent from January through March, the Commerce Department said Wednesday. That’s better than last month’s estimate of a 0.7 percent decrease.

Harsh winter weather slowed spending by keeping consumers away from shopping malls and auto dealerships. The trade deficit ballooned, slicing growth by the most since 1985 as exports fell and imports rose.

Yet consumers stepped up their spending in May, and home sales are climbing — signs that the economy is back on track. In addition, many of the headwinds the economy faced in the first quarter — from an increase in the dollar’s value to spending cutbacks by oil drillers — are fading.

“Growth should remain near 3 percent in the second half of the year as the dampening effects of a strong dollar and oil industry slump fade,” Sal Guatieri, an economist at BMO Capital Markets, said in a note to clients.

Forecasting firm Macroeconomic Advisors predicts growth will reach 2.7 percent in the second quarter. And many economists agree with Guatieri that growth should reach 3 percent in the second half of the year.

Still, that would leave growth in the first half at a weak 1.2 percent annual rate. The economy appears to be on track for another year of modest 2 percent to 2.5 percent growth.

That’s far below the optimism at the beginning of the year, when lower oil prices and healthy hiring led many economists to forecast growth above 3 percent. The economy hasn’t reached that level in a decade.

Exports were hammered in the first quarter by a sharp rise in the dollar’s value, which makes U.S. goods more expensive overseas. The dollar has strengthened 15 percent in the past year compared with a basket of other currencies.

That also makes imports cheaper and better able to compete with U.S.-made goods. Imports increased 7.1 percent in the first quarter, while exports fell 5.9 percent. That widened the trade gap, cutting nearly 1.9 percentage points from growth, the most in 30 years.

Americans saved more in the first quarter, aided by lower gas prices and greater hiring. The saving rate rose to 5.4 percent from 4.7 percent in the fourth quarter, the highest in more than two years. Consumer spending growth slipped to just 2.1 percent, down from 4.4 percent in the final three months of last year.

But since then, there have been signs that Americans are opening their wallets again. That should provide a crucial boost to growth in the second quarter and the rest of the year. Consumer spending accounts for 70 percent of economic activity.

“The slowing in consumer spending looks more like a pause that refreshes ... rather than the start of a weakening trend,” Guatieri said.

Sales at retail stores and restaurants jumped 1.2 percent in May, as shoppers spent more on clothes, building materials and furniture.