U.S. Economy Shrinks in the First Quarter on Lower Business Investment

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U.S. Economy Shrinks in the First Quarter on Lower Business InvestmentThe U.S. economy shrunk in the first quarter as businesses held back their investments and boosted inventories much slowly than usual owing to the extreme winter weather.

Gross domestic product declined by 1 percent year-on-year in the first three months of the year, down from the earlier-announced 0.1 percent expansion, reported the Commerce Department on Thursday. The decline was the highest in three years; the economy last contracted in the first quarter of 2011. A Bloomberg survey of economists had expected the economy to shrink by 0.5 percent.

Businesses added $49 billion worth of inventories in the first three months of the year, down from $117 billion in the fourth quarter of 2013. The slow accumulation of inventories shed off 1.62 percentage points of the economic growth in the first quarter.

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However, key indicators such as manufacturing, labor market and retail sector showed signs of recovery, indicating that the sluggish performance in the first quarter is only temporary.

“The good news is that the first quarter is over, it was a difficult one for the U.S. economy,” Ryan Sweet, a West Chester, Pennsylvania-based senior economist at Moody’s Analytics Inc. told Bloomberg. “I wouldn’t worry too much about the decline; it’s mostly driven by less construction spending and less inventory accumulation. This quarter should be a good one.”

Separate data released by the Labor Department today revealed that U.S. jobless claims declined last week. The number of unemployed Americans who applied for the jobless benefits plunged by 27,000 to 300,000.

Economists surveyed by Bloomberg expect the economy to grow by 3.5 percent in the second quarter. The economy grew by 1.9 percent last year, after posting 2.8 percent growth in 2012. To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.

To contact the reporter of this story; Jonathan Millet at john@forexminute.com