Ahead of the Bell: US economy-GDP

US economy expected to show bigger dip in first quarter but analysts optimistic for rebound

Associated Press
Ahead of the Bell: US economy-GDP
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In this Tuesday, April 29. 2014 photo, a worker positions iron girders at a building construction site, in Boston. The Commerce Department releases first-quarter gross domestic product on Wednesday, June 25, 2014. (AP Photo/Steven Senne)

WASHINGTON (AP) -- The government issues its third estimate of the U.S. economy's performance in the January-March quarter.

SHRINKING ECONOMY: Analysts expect that the overall economy shrank at an annual rate of 1.8 percent in the first quarter, according to a survey by data firm FactSet.

TEMPORARY DIP: A decline of that magnitude would be the weakest quarterly performance since the economy shrank at a rate of 5.4 percent in the first quarter of 2009 during the depths of the Great Recession.

While such a sharp contraction would typically stoke fears of a country sliding back into recession, most see the weakness at the start of the year as the temporary result of severe winter storms that shut factories, disrupted shipping and kept Americans away from shopping malls and auto dealerships.

Economists are looking for a solid rebound in the April-June quarter to growth perhaps as strong as a 4 percent annual rate. They also think the economy will remain in a higher gear for the rest of this year and into 2015.

Analysts see solid hiring, growth in manufacturing and surging auto sales contributing to a stronger economy going forward.

A stumbling housing recovery has been a concern but even there, recent data on home sales and construction have been more encouraging.

Just a month ago, the government estimate that the economy contracted by a smaller 1 percent rate in the first quarter. But since that estimate came out, the government has reported new data on spending on health care showing it was not as strong as first believed.

Government analysts had made assumptions about how much health care spending would rise given the increased coverage Jan. 1 provided by the Affordable Care Act. However, when actual data became available, those initial estimates provided far too optimistic.

As bad as the first quarter was, analysts remain optimistic about a solid rebound in the April-June quarter. They believe consumer spending bounced back strongly, as has already been seen in auto sales this spring. Much of the optimism also reflects the strong growth in jobs in recent months.

"We have ample evidence that the first quarter was just a temporary setback for the economy and we are climbing out of the hole in the current quarter," said Stuart Hoffman, chief economist at PNC Financial.

Many economists are optimistic that strong growth will continue in the second half of the year, predicting growth of around 3 percent. That would be a significant improvement from the slow, 2 percent pace seen through the first five years of this sub-par economic recovery.

"We should have a much better second half this year and a much better 2015 than 2014," said Mark Zandi, chief economist at Moody's Analytics. He said he was forecasting growth of 3.5 percent to 4 percent in 2015. That would be the best year since the economy grew 3.8 percent in 2004.

"In past recoveries we have always gotten a year of very strong growth. I think we will get that in 2015," Zandi said, helped by a long-awaited improvement in wage growth.

Of course, the optimistic projections could prove too rosy. Analysts see risks to their forecasts, primarily the possibility that tensions in the Middle East could cause oil prices to surge, especially given the deteriorating situation in Iraq.

Surging energy prices have preceded earlier economic slowdowns, including the most recent recession.

"If Iraq remains a problem through the remainder of the year, it will subtract from growth at the margin," Zandi said. "If events unravel and the insurgency goes south into Iraq's oil fields, then oil prices will spike. That is the biggest concern. That the insurgency continues to mushroom."

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