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    US Economy Reverses in the First Quarter

     

    The American economy slipped into contraction in the first quarter as consumer spending remained below par and the strong dollar curbed demand for U.S exports.

    Gross domestic product, the widest measure of national economic activity, declined at a 0.7 percent seasonally adjusted annual pace in the first quarter, according to the Commerce Department in Washington, D.C. today. Economists had forecast a 0.9 percent decline.

    This was the first revision of the original 0.2 percent estimate. The final adjustment will be issued on June 24th.

    The Bureau of Economic Analysis, a division of the Commerce Department, has said they expect to apply a second seasonal adjustment to the GDP figures beginning with the 2nd quarter numbers on July 30th , to correct for what they call "residual seasonality.”

    The raw statistics that comprise the GDP calculation are already seasonally adjusted once before they are included in the GDP estimate.   It is widely expected that the second seasonal adjustment will produce higher GDP numbers.

    A larger trade deficit with exports falling more than imports, sluggish consumer demand which grew at only a 1.8 percent annual rate in the quarter and a smaller accumulation of inventories than previously estimated, accounted for most of the downward revision.

    Consumer demand had originally been listed at 1.9 percent and analysts had predicted a gain to 2.0 percent. Household spending had expanded at a 4.4 percent annual rate in the fourth quarter.

    Exports declined 7.6 percent in the first three months, worse than the first estimate of -7.2 percent. Goods exports dropped by 14 percent, the most in six years. Government expenditures were 1.1 percent lower, down from the previously 0.8 percent measure.

    Overall, inventories were the largest component of first quarter GDP growth, adding $106 billion to economic activity.

    This inventory represents a likely drag on second quarter GDP as manufacturers and retailers will curtail production and new orders until the accumulated inventory is sold. Without the production that went into inventory first quarter GDP would probably have been considerably worse.

    A measure of economic output that excludes the purchase of inventories by businesses called real final sales fell 1.1% in the first three months of the year after rising 2.3 percent in the final quarter of 2014. It was the largest quarterly drop since the first three months of 2009.

     

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg

    GDP-white; Real Final Sales -yellow; Personal Consumption-green

    gdp etc may 29

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