Weather disruptions at home and weak demand abroad caused a contraction of rare severity in the U.S. economy in the first quarter, renewing doubts about the strength of the nation's five-year-old recovery.
Gross domestic product, the broadest measure of goods and services produced across the economy, fell at a seasonally adjusted annual rate of 2.9% in the first quarter, the Commerce Department said in its third reading of the data Wednesday.
That was a sharp downward revision from the previous estimate that output fell at an annual rate of 1%. It also represented the fastest rate of decline since the recession, and was the largest drop recorded since the end of World War II that wasn't part of a recession.
To be sure, many signs since March, including reports of growth in consumer spending, business investment and hiring, indicate the first quarter doesn't mark the start of a new recession. And revisions in future years could alter the first-quarter figure.
J.P. Morgan Chase economist Michael Feroli described the decline as "mostly a confluence of several negative, but mostly one-off, factors."
But the severity of the drop, he said, "calls into question how much vigor there is in the pace of activity" going forward.
One factor in the government's revision of first-quarter output was difficulty in estimating the impact of the Affordable Care Act on health-care expenditures. Actual health spending came in substantially lower than expected based on ACA enrollments and Medicaid data, declining at a 1.4% annualized pace in the period compared with an earlier estimate of a 9.1% increase.
Beyond that, consumer spending on goods, business outlays on equipment and housing investment were all soft, a weakness that economists have attributed, at least in part, to unusually harsh winter weather.
Overall consumer spending on goods and services, which accounts for more than two thirds of economic output, increased at an annual rate of 1%, off from the earlier estimate of 3.1% growth.
The Commerce report showed businesses sharply drawing down inventories in the first quarter after building them up to levels deemed unsustainable by economists late last year. The move subtracted 1.7 percentage points from growth.
Exports in the period fell by nearly 10%, a new sign of a challenging global economic environment. The European recovery remains anemic, while growth in fast-expanding emerging markets such as China and Brazil has downshifted.
The severity of the first-quarter downturn is at odds with other data showing greater strength in the economy, especially a recent pickup in job creation. Since World War II, there have been 15 other quarters during which GDP contracted by this amount or more. In 14 of those 15 quarters, hiring contracted along with output.
Meanwhile, early data from the second quarter indicate the economy has improved this spring, as warmer weather has helped release pent-up demand. Sales of new homes surged to a six-year high last month, while existing-home sales rose to their highest level since October, data released earlier this week showed.
"Things are looking very strong here in Naples," said Anthony Solomon, owner of The Ronto Group, a land developer in Naples, Fla. "In all our communities, we're seeing great appetite from home builders and from end buyers."
Still, the depth of the first-quarter decline in output means growth during the first half of the year likely will fall below the economy's average rate of just over 2% since it emerged from recession in June 2009. That is below the longer-term growth rate, during recent decades, of slightly more than 3%.
"It does not sound like the economy has reached escape velocity no matter how you try to spin it," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi.
For economic output to ratchet up to a healthier long-term trend, economists say consumer spending must rise to its prerecession pace of about 3% growth. But five years into the recovery, high unemployment and stagnant incomes continue to restrain the American consumer.
"We just don't see consumer spending coming back to the levels that they were before," Virginia McDowell, chief executive of Isle of Capri Casinos, Inc., recently told investors at a presentation of the company's fourth-quarter earnings. "We continue to get pressured on the top line because our consumer spending habits have changed," Ms. McDowell said.
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