US economy contracts severely in first quarter

The US economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled.

Gross domestic product fell at a 2.9% annualised rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1% drop, the Commerce Department said. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. The revision reflected a slowdown in healthcare spending.

Consumers returned to stores and car dealerships, companies placed more orders for equipment and manufacturing picked up as temperatures warmed, indicating the early-year setback was temporary. Combined with more job gains, such data underscore the view of Federal Reserve policy makers that the economy is improving and in less need of monetary stimulus.

The first-quarter slump is “not really reflective of fundamentals,” said Sam Coffin, an economist at UBS Securities LLC in New York. “For the second quarter, we’ll see some weather rebound and a return to more normal activity after that long winter.”

Another report showed orders for business equipment climbed in May, showing corporate investment is helping revive the economy after the slump at the start of the year. Bookings for non-military capital goods excluding aircraft rose 0.7% after a 1.1% drop in April, according to the Commerce Department.

Companies boosted stockpiles by $45.9 billion (€33.66bn) in the first quarter, compared with the $49bn gain previously reported and less than the $111.7bn build-up in the final three months of 2013. Inventories subtracted 1.7 percentage points from GDP from January to March, the most since the fourth quarter 2012.

Aside from services, consumer outlays on goods also slowed from the end of 2013, rising at a 0.2% rate. Demand faltered as the northern and eastern US experienced above-average snowfall from December through February, keeping Americans closer to home. Since then, households have boosted spending. Cars and light trucks sold in May at a 16.7 million annualised rate, the strongest since February 2007, according to data from Ward’s Automotive Group.

The weather earlier this year hampered production at factories, which had trouble obtaining materials in time. Since then, assembly lines have become busier.