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The first-quarter showing is the worst since the first three months of 2009, when the recession set in and the economy contracted by 5.9 per cent. (Mario Anzuoni/REUTERS)
The first-quarter showing is the worst since the first three months of 2009, when the recession set in and the economy contracted by 5.9 per cent. (Mario Anzuoni/REUTERS)

U.S. economy back on track, but first quarter was nasty Add to ...

It turns out the pothole the U.S. economy hit in the first quarter was more like a crater.

An updated estimate by the Commerce Department showed gross domestic product deteriorated at an annual rate of 2.9 per cent in the first three months of 2014, a stark revision that forced economists to downgrade their forecasts of how much the world’s largest economy will grow this year.

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The United States survived the setback, which most economists agree was the result of an abnormally severe winter that reached into southern states ill-equipped to deal with onslaughts of ice and snow.

More recent evidence shows the economy is back on track: Hiring, retail sales, new-home construction and consumer confidence all rebounded smartly this spring. A separate government report Wednesday showed inventories for non-defense durable goods jumped 1 per cent in May after a 0.4-per-cent increase the previous month.

“In my industry, it’s the busiest I’ve seen in 20 years,” said Steve Mai, chief executive of Cambridge, Ont.-based Eclipse Automation Inc., a custom maker of manufacturing equipment that also has operations in North Carolina and California.

The first-quarter reading still stings. The Commerce Department initially reported the GDP growth simply stalled. A second estimate said GDP shrunk at an annual rate of 1 per cent, the first contraction since first-quarter of 2011. The final reading shows the U.S. endured its biggest economic collapse since the Great Recession in 2009.

America’s economy expanded at annual rates of 4.1 per cent in the third quarter of 2013 and 2.6 per cent in the fourth. Wall Street analysts had predicted the first-quarter estimate would be revised lower, but only to a contraction of 1.8 per cent. Equity markets rose, evidence that traders are more focused on signs of future growth.

Some also could be betting that a deeper-than-realized hole at the start of the year will cause the Federal Reserve to leave its benchmark interest rate at zero for longer than it had previously planned.

Central bankers watch something called the “output gap,” an imprecise measure of current economic production with the level of output policy makers reckon an economy can produce without stoking inflation. The Fed’s policy committee last week dropped its 2014 growth estimate to between 2.1 per cent and 2.3 per cent from as much as 3 per cent earlier. The Commerce Department’s surprisingly grim assessment of the first quarter could pull the Fed’s outlook lower, depending on how quickly the U.S. rebounds over the spring and summer months.

“If the economy is growing below 2.5 per cent, how can the labour market slack shrink enough to support a rate hike sooner rather than later?” said Adrian Miller, director of fixed-income strategy at GMP Securities in New York.

Mr. Miller said he likely will reduce his own 2014 outlook almost half a percentage point, dropping his forecast to as low as 2.3 per cent. That’s essentially what the Fed thinks is the U.S. economy’s natural rate of expansion over the longer term. However, it’s not fast enough to quickly lower the unemployment rate, which currently is the Fed’s primary goal. Mr. Miller said the first-quarter GDP figures hardened his view that the Fed will leave its benchmark rate unchanged until the third quarter of 2015.

Like a race car coming out of a pit stop, the U.S. economy is reaccelerating.

It had good momentum going into the winter. Personal consumption expenditures grew at an annual rate of 3.3 per cent in the fourth quarter, and exports surged 9.5 per cent. Non-residential fixed investment advanced at a 5.7-per-cent rate. Frigid temperatures and relentless snow storms knocked the recovery off track. Consumption gains slowed to 1 per cent in the first quarter and exports and investment plunged at annual rates of 8.9 per cent and 1.2 per cent respectively.

The U.S. economy now is growing again. Economists at National Bank Financial, PNC Financial Services, and Deutsche Bank, among others, say GDP likely grew at an annual rate of 4 per cent in the second quarter. State and local governments in the U.S. are starting to spend again, removing a drag on the economy. Steady hiring should buoy household spending and a stronger global growth should bolster exports.

But it’s possible the sustained surge in economic activity that typically follows recessions won’t come this time. The average annual growth rate of the current expansion is 2 per cent, slower than the 3.2-per-cent average pace in economic expansions since 1980, according to Hamilton Place Strategies, a consultancy based in Washington.

Mr. Mai of Eclipse Automation says the economy is behaving differently than he’s observed in the past. Eclipse supplies lots of different industries, including autos, solar and health. Typically, demand from one or two industries spikes, while others putter along. Now, orders are steady across the board.

“I’m not seeing any one industry spiking, I’m seeing six industries moving up gradually,” Mr. Mai said in an interview this month from Charlotte, NC. “In my business, that’s huge. That’s not common.”

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