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U.S. recovery will just have to wait a little longer

There's no way around it: The U.S. first-quarter gross domestic product numbers were deplorable. But they're already ancient history.

The U.S. Commerce Department's final estimate of first-quarter GDP, released Wednesday morning, reported that the economy shrank at a 2.9-per-cent annualized rate in the quarter. Not only was that much worse than economists had anticipated (and a massive revision, even by Commerce's notoriously revision-happy standards, from its previous estimate of a 1-per-cent decline), it was also the worst economic performance since the 2009 first quarter – when the Great Recession still had the global economy by the throat. That's not a comparison anyone wants to see – least of all Canadians, whose own economic recovery is deeply dependent on an acceleration in U.S. demand for its exports.

But the first quarter ended, well, almost a full quarter ago. It will be remembered as an unusually harsh winter that slowed the U.S. economy – but only temporarily. As hoped, growth has bounced back in the second quarter, and the U.S. economy looks to be back on track – although will probably now be a little late arriving at its destination.

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Employment rose nearly 500,000 in the first two months of the second quarter, putting it on track for the strongest quarter of hiring in more than two years. Retail sales were up a solid 0.8 per cent in the same period. Consumer confidence is at its highest level since before the Great Recession. New-home sales hit a six-year high in May; home resales surged to a seven-month high. Markit's preliminary manufacturing purchasing managers index (PMI), a closely watched harbinger of factory activity, hit a four-year high in June.

The U.S. durable-goods report, released at the same time as (and thus massively overshadowed by) Wednesday's GDP report, may contain one of the most hopeful signs of all. Capital-goods orders – an indicator of business capital investment, which was one of the biggest drags on first-quarter GDP – jumped 0.7 per cent in May. Paul Dales, senior economist at Capital Economics, said business investment is on track for 7-per-cent annualized growth in the second quarter, a sharp reversal from the first-quarter's 2.8-per-cent contraction.

That data support the belief that the first-quarter slowdown was, in fact, a weather-driven slump, giving way to an economy that has spent the spring catching up on lost time and releasing pent-up demand. Economists expect second-quarter GDP growth of about 3.5 per cent annualized.

Still, the depth of the first-quarter downturn has put the U.S. recovery behind schedule. Just last week, the Federal Reserve trimmed its 2014 GDP growth estimate to 2.2 per cent, from 2.9 per cent in March. Even to achieve this reduced estimate, GDP will have to grow by 3 per cent over the last nine months of the year – or the equivalent of a 4-per-cent annualized pace. It's a tall order, and taller than most economists are expecting.

Consensus forecasts (compiled by Bloomberg) are for annualized growth rates of 3.5 per cent in the second quarter, and 3.1 per cent in each of the third and fourth quarters. If those numbers are achieved – and it's worth noting that the U.S. economy hasn't had three consecutive months of a 3-per-cent-plus growth pace in nearly a decade – GDP growth for the full year will be something more like 1.7 per cent.

That implies that, barring an upside growth surprise, the U.S. output gap is on track to close a little later than previously thought, which suggests the Fed might not start raising interest rates as soon as some people have been predicting.

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