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U.S. Economy Shrunk In First Three Months Of The Year

The U.S. economy shrunk at an annual pace of 1% — its first contraction since the beginning of 2011.

Posted on May 29, 2014, at 9:29 a.m. ET

The United States economy is shrinking for the first time in three years, according to newly revised economic data the Commerce Department released Thursday.

The economy shrunk at an annual pace of 1%, the Commerce Department said today, in a planned revision of data that first said the economy had grew at a meager 0.1% in the first quarter. The Bureau of Economic Analysis, which compiles U.S. economic data, blamed the weak results on lower exports, a decrease in new inventories of goods made by private companies, a decrease in new nonresidential buildings, and less state and local government spending. This is a big drop from the 2.6% annual growth pace in the fourth quarter of this year.

The poor results, which could be revised again when the Commerce Department releases its third and final update of the first quarter data, took the economics community by surprise. A Reuters poll of 85 economists did not have a single one predicting such a weak number.

Much of the turn from the barely positive 0.1% annual growth rate in gross domestic product to the 1% downturn came from weaker "change in private inventories" data in the revised figures.

This statistic measures the change in the value of the physical stuff businesses accumulate in the hope of producing or selling more stuff — and it has dropped off dramatically in the beginning of this year. In the third and fourth quarter of last year, inventories increased $115.7 billion and $111.7 billion respectively. According to the most recent figure, only $49 billion worth of private inventories were added. The small dip from the third to fourth quarter took .02 percentage points off of GDP, while the much larger dip took 1.62 percentage points off the GDP number for the first quarter of this year. The last time private inventories dipped more was the fourth quarter of 2012, when the economy grew at a mere 0.1% annual rate. It would grow 1.9% in all of 2013.

The Commerce Department describes change in private inventories it as "one of the most volatile components of gross domestic product" and says it has "an important role in shortrun variations in GDP growth."

Consumers, however, appear to be spending more and doing better. Personal consumption of goods and services grew at a pace of 3.1% annually, the second highest quarter for personal consumption since the end of 2010. More recent economic data is not consistent with an economy that is continuing to shrink. In April, the economy added 288,000 new jobs, the biggest month for job growth in over two years, well above the 190,000 new jobs a month average over the past year.

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