Economy
2:58 pm
Thu May 29, 2014

The Economy Takes A Dip, But Analysts Look For It To Snap Back

The Commerce Department on Thursday said the U.S. economy shriveled during the icy winter, contracting at a 1 percent pace.

So does that news leave you feeling chilled with disappointment, or revved up for a summer rebound?

How consumers and business owners answer may determine the direction of jobs and economic growth for the back half of 2014.

Most economists favor the revved-up scenario. They are saying consumers and employers should brush off the news that gross domestic product shrank during January, February and March. The experts say builders couldn't build and shoppers couldn't shop when the snowdrifts were piled high.

Winter's Impact Felt

The first-quarter downturn reflected the "unusually severe winter weather, including record cold temperatures and snowstorms," Jason Furman, chairman of the president's Council of Economic Advisers, said in a statement.

In its initial estimate of first-quarter growth, the Commerce Department had said the GDP, a measure of all goods and services, had grown one-tenth of a percentage point. But as more data came in, the department revised its estimate — down to a contraction of 1 percent at an annualized rate.

That was the first time in three years that the U.S. economy had actually gotten smaller.

But Furman says the new data prove that when the weather started to improve, the economy thawed too. For example, light vehicle sales fell in January and February when ice and snow kept many people at home. But then those sales rebounded in March. Furman said he expects "all of that lost activity to be made up in the second quarter."

In fact, construction companies and merchants should be preparing for a growth spurt, the argument goes. The winter contraction "coiled the 'economic spring' even tighter for a sharp snap-back," Stuart Hoffman, chief economist for PNC Financial Services, said in his written assessment.

He believes the economy is expanding at a robust 4 percent annualized rate this spring.

And Doug Handler, chief U.S. economist for IHS Global Insight, is likewise sticking by his call for "a sharp rebound in the second quarter."

He bases his optimism on Commerce Department data pointing to better days ahead for workers. "Total hours increased at a 1.6 percent annual rate in the first quarter, and 569,000 new jobs were created between December and March," Handler said. In addition, "consumer spending remains strong, increasing at a 3.1 percent annual rate," he said.

When you put it all together, the rebound will keep the economy growing at a healthy 3.5 percent, Handler said.

David Rosenberg, chief economist at Gluskin Sheff and Associates, told his clients that he sees "near-0 percent odds of recession for the coming year."

Stock investors seem to agree that the GDP contraction should not be taken as a sign of a coming recession. After the GDP revision was announced, they sent stock prices modestly higher.

The Great Recession's Long Shadow

Still, the GDP report cannot be entirely ignored. If nothing else, it is further evidence that the Great Recession has cast a very long shadow. Economists for the government consider the recovery to have begun in summer of 2009. But growth has never been robust for long, with constant dips interrupting momentum.

Throughout the recovery, job growth has been subdued and weak wage growth has hurt consumer spending. And those factors have weighed heavily on housing.

On Thursday, the National Association of Realtors said its seasonally adjusted index of pending sales of existing homes rose just 0.4 percent last month. That was far below the 2 percent rise most economists had been predicting.

The statement issued by Realtors Chief Economist Lawrence Yun reflected both the hope for better days and frustration with the economy's stutter steps.

"An uptrend in closed sales is expected," he said. But Yun added that "some months will encounter a modest setback."

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