U.S. GDP posts smallest gain in three years

Scant 0.1% gain a residue of bad weather, but spring may revive growth

By Jeffry Bartash, MarketWatch

An earlier version of this article gave the incorrect figure for ADP employment growth in April.

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.

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Wall Street expected a poor number, but the weakness was 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 is now occurring in the spring. Private-sector hiring, for example, increased by 222,000 in April to reach a five-month high, payroll processor ADP said Wednesday.

Economist predict second-quarter growth will speed up to 3.5%, the MarketWatch survey shows.

What’s less certain is whether the U.S. can sustain that sort of pace in the second half of the year. The recovery has been uneven since it began in mid-2009 and annual growth have hovered around 2%, well short of the nation’s historical average of 3.3%. U.S. wages still aren’t rising all that much, the housing market has been hurt by higher prices and interest rates, government spending remains weak and the global economy is also soft.

Economists are pinning their hopes for faster growth on a pickup in hiring that bolsters consumer incomes and spending and a springback in business investment to keep up with rising demand. Neither consumers nor businesses have spent aggressively since the end of the Great Recession, but household debts have fallen sharply and corporate profits are at record highs. That might make them more willing to spend and invest.

“The rebound in growth that is already under way will be sustained,” asserted Scott Hoyt, senior director of economic research at Moody’s Analytics. “The economy’s fundamentals are strong.”

U.S. stocks rose slightly in Wednesday action.

Inside GDP report

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 services related to the enactment of the law commonly known as Obamacare. The spike in health-care spending, as a percentage of GDP growth, was the highest ever recorded.

The 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 advance in nearly three years.

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