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U.S. GDP posts smallest gain in three years

MARKETWATCH 8:52 AM ET 04/30/14


WASHINGTON (MarketWatch) -- Growth in the U.S. economy almost came to a halt in the first quarter, a bout of weakness spurred by one of the worst winters in years.

Gross domestic product rose at an annual rate of just 0.1% from January through the end of March, the weakest performance in three years, according to a preliminary estimate by the Commerce Department. Economists surveyed by MarketWatch had forecast growth to slow to a seasonally adjusted 1% from a 2.6% clip in the final three months of 2013.

Wall Street expected a poor number, but the weakness appeared even more widespread than had been forecast. Investment in business equipment and residential home construction both declined, U.S. exports fell sharply, government spending dropped again and companies increased inventories at a much slower rate.

Despite the poor growth at the start of 2014, a batch of early indicators suggest the U.S. economy is accelerating in the second quarter. One reason: Some of the hiring, consumer spending and business investment put off in the first quarter because of bad weather may now occur in the spring.

The best news in the first-quarter report was a 3% gain in consumer spending -- the main driver of the U.S. economy -- following a robust 3.3% advance in the fourth quarter. Yet the increase was largely driven by big spikes in utilities such as heating because of the cold weather as well as higher outlays on health care related to the enactment of the law commonly known as Obamacare.

As a result, spending on services jumped 4.4%, the biggest increase in almost 14 years. Spending on goods rose a much slimmer 0.4%, the weakest gain in almost three years.

Business investment on equipment, meanwhile, fell 5.5% to mark the biggest drop in almost five years.

Investment in home construction also fell for the second quarter in a row, down an annualized 5.7%.

The estimated increase in inventories was $87.4 billion, smaller than the record $100 billion-plus spikes in the third and fourth quarters of 2013. A slower inventory buildup subtracts from GDP.

A higher trade deficit was also another drag on growth. Exports fell 7.6%, a much steeper drop than the 1.4% decline in imports.

Government spending rose slightly at the federal level after a 5.2% decline in the fourth quarter. Yet overall government outlays declined by 0.5% because of cutbacks by states and localities.

Excluding inventories, final sales of American-made goods and services softened to a 0.7% pace from 2.7% in the fourth quarter.

Inflation as measured by the PCE index rose at a 1.4% annual pace, or by 1.3% excluding food and energy. Over the past year the PCE index has risen just 1.1%.

Inflation-adjusted disposable income, or the money left over after taxes, climbed 1.9%, mainly because of higher government benefits such as Medicaid tied to the introduction of the new health-care law.

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-Jeffry Bartash; 415-439-6400; [e-mail]

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