Economy Contracts for the First Time in Three Years during Q1 2014

The economy in the U.S. contracted for the first time in three years from January through March as companies added to inventories at a slower pace and slowed investment. The U.S. Commerce Department reports that gross domestic product fell at a 1 percent annualized rate in the first quarter, a larger decline than projected, after a previously reported 0.1 percent gain. The last time the economy shrank was in the same three months of 2011.

A faster sales retailers, stronger manufacturing, and faster job growth indicate the first-quarter setback will prove temporary as demand improves. Fewer Americans than forecasted filed for unemployment benefits for the week ending May 24. Jobless claims dropped by 27,000 to 300,000. The four-week average decreased to the lowest level since August 2007.

The economy in the second quarter will expand at a 3.5 percent rate, according to the median projection of 72 economists surveyed by Bloomberg in early May. For all of 2013, the economy expanded 1.9 percent after a 2.8 percent gain in 2012. Non-residential investment dropped at a 1.6 percent annualized rate. Companies reduced their spending on structures at a 7.5 percent pace, the biggest decrease in a year. Spending for equipment fell 3.1 percent, the most since the third quarter 2012.

Consumer purchases, which account for about 70 percent of the economy, increased at a 3.1 percent annualized rate in the first quarter. The gain, which added 2.1 percentage points to GDP, was more than the previous estimate of 3 percent. The increase reflected a stronger pace of spending on services, such as utilities, than the previous three months.