Gross domestic product sagged in first quarter

Nondurable goods slightly increased in the first quarter.

By Yimian Wu

The U.S economy contracted 0.7 percent in the first quarter as the trade deficit widened and business investment fell, according to the second estimate of gross domestic product (GDP) by the Commerce Department.

The result was revised from the first estimate of an increase of 0.2 percent released last month, but it was better than expected. According to Bloomberg, the median forecast of 84 economists expected a 0.9 percent drop.

Real exports of goods and services decreased 7.6 percent, revised from 7.2 percent, and compared with an increase of 4.5 percent in the fourth quarter last year. Real imports of goods and services increased 5.6 percent, revised from 1.8 percent, and compared with an increase of 10.4 percent.

“Net exports balance widened more than previously believed. It took away 1.9 percentage points from GDP growth,” said Stay Shipley, a macro research analyst at Evercore in a note.

Lindsey Piegza, chief economist at Sterne Agee, said in an e-mail, “The dollar has definitely made U.S.-made goods less competitive but growth has also slowed globally, decreasing the demand for U.S.- made goods outright.”

Inventory accumulation was slower than expected. Private business increased inventories $95 billion in the first quarter, revised from $110.3 billion in the prior estimate.

However, both real nonresidential fixed investment and nonresidential structures investment were revised up modestly. Investment in equipment increased 2.7 percent, revised from 0.1 percent, and compared with 0.6 percent in the fourth quarter.

“Investment was still very weak particularly in residential,”said Piegza, who thinks the economy is still sluggish. “Equipment orders were better, most likely reflecting a decline in import costs and record low financing costs, which many businesses fear will disappear if the fed raises rates.”

However, Shipley, who thinks the U.S economy is in “pretty good shape,” said in a phone interview that investments have to keep up with the higher demand growth.

Nondurable goods consumption was revised up slightly, and durable goods consumption stayed the same as the first estimate.

According to Bloomberg, economists expect second-quarter GDP to grow 2.65 percent. But Piegza sees “markedly sluggish growth” of only  1.5 percent.

Shipley expects GDP in the current quarter to be “robust,” saying construction will be the main driver, and consumer sentiment will improve.

Photo at top: Consumption of nondurable goods slightly increased in the first quarter. Shoppers browsed State Street in Chicago. (Yimian Wu/Medill)