By Josh Mitchell
The U.S. economy shrank during the first quarter as another
brutal winter highlighted the fragility of the nearly six-year-old
expansion, a historically choppy stretch during which the nation
has struggled to thrive in an uneven global environment.
Gross domestic product, the broadest measure of goods and
services produced across the U.S., contracted at a 0.7% annual rate
during the first three months of the year, the Commerce Department
said Friday.
That was far worse than the agency's initial estimate that
showed 0.2% growth, marking an abrupt reversal from the prior nine
months when growth surged and the economy appeared on the verge of
a long-delayed breakout.
The economy has now contracted in three separate quarters since
the recession ended in mid-2009, a series of disappointments
unmatched since the expansions of the 1950s.
Harsh weather, a strong dollar and a labor dispute at West Coast
ports appeared to be the biggest culprits this time, all sapping
demand for American goods at home and abroad.
"When you're this weak, little things can knock you off course,
whether it's the Arab Spring...or 'Snowmageddon,' " said Dan
Greenhaus, chief global strategist at brokerage firm BTIG. "We have
an incredibly weak economy that's susceptible to momentary
interruptions."
The Federal Reserve has viewed the first-quarter stumble as due
largely to transitory factors--such as the stronger dollar--that
will dissipate in coming months. The central bank is looking for
signs of a rebound soon as it plots when and how quickly to raise
short-term interest rates, which have been near zero since December
2008 to stir economic growth.
Economists generally expect the economy to bounce back this
spring, as it did after first-quarter contractions in 2011 and
2014. But they warned growth will likely remain modest, in line
with the roughly 2% overall pace of recent years. The first half of
2015 is shaping up to be one of the weakest six-month stretches of
the expansion, with economists predicting annualized growth of
between 2% and 3% during the current quarter. By comparison, the
economy grew more than 3% a year on average between 1983 and
2007.
Further complicating the outlook is that other signs point to
the economy humming along at a steady, though modest, growth pace.
Company layoffs are exceptionally low and hiring across the U.S.
remains solid. Mortgage applications are up amid other signs of
growing housing demand.
"We're still growing at a relatively steady pace, although one
that just doesn't feel satisfying," said Richard Moody, chief
economist at Regions Financial Corp. "Six years into the recovery,
we still really haven't absorbed all of the idle capacity in the
economy. When your underlying trend of growth is so slow, it
doesn't take much to just kind of stop the train."
Some of the strongest headwinds facing the U.S. are tied to
economic woes around the globe, including the U.S.'s biggest
trading partners. Canada reported Friday that its economy
unexpectedly contracted at a 0.6% annual pace in the first quarter.
Mexican officials recently slashed their forecast for growth this
year after reporting that the economy grew in the first quarter at
the slowest pace in more than a year.
The stronger dollar, which makes U.S. goods more expensive
abroad, also hasn't helped. Friday's GDP report showed that U.S.
exports of goods fell by the most since early 2009, during the
waning months of the recession. While a key measure of U.S.
corporations' after-tax profits grew 3.1% over the period, it
wasn't on pace to match the growth of the prior two years.
"We have a macro-slowdown around the world," Stephen Angel,
chief executive of industrial gas supplier Praxair Inc., told
analysts this past week. "There's less capital investment. China is
decelerating...so there's less proposal activity."
His company, based in Connecticut, is one of many being hit by
depressed oil prices. While the price of oil--around $60 a
barrel--is up in recent months, it's far from the 2014 peak of
$107.26.
The oil-price drop has boosted consumers' finances by lowering
their gasoline bills, a development expected to boost the economy
throughout this year. But the most dramatic effect thus far has
been a drop in business investment, with energy companies holding
off on drilling and equipment purchases as they deal with squeezed
profits.
A measure of business spending on construction, machinery, and
research and development fell at a 2.8% pace in the winter. That
was the biggest decline since late 2009.
The strength of an economic rebound will hinge largely on the
health of consumers. Consumer spending, representing more than
two-thirds of overall economic output, grew at a 1.8% rate in the
first quarter, far slower than the fourth quarter's 4.4% growth.
Household spending on long-lasting manufactured items was the
weakest in nearly four years.
That may have been tied to nasty weather, though consumers also
appear wary about the economy's strength. A University of Michigan
measure of consumer sentiment on Friday showed consumer attitudes
at a six-month low in May.
Steady hiring could support a consumer rebound, though.
Right at Home Inc., a nursing-care provider for seniors and the
disabled, shows the divide between the strong hiring outlook and
the struggle to deliver higher-paying jobs that would significantly
boost overall economic growth.
Rob Chester, owner of a mid-Atlantic franchise of the company,
said he's unfazed by the economy's latest struggles because of
long-term dynamics working in his favor, namely the aging of baby
boomers. The franchise plans to hire between 15 and 30 caregivers
for a Maryland location this summer. "There's going to be an
increasing demand for this type of service," Mr. Chester said.
But the jobs aren't the kind of well-paying positions that
provide a bigger economic boost and that previous expansions
delivered in greater numbers. Starting pay for his workers will be
$10 an hour, and many of them will be part time.
Write to Josh Mitchell at joshua.mitchell@wsj.com