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First-Quarter GDP Growth Hits Wall

american-moneyThe nation’s economy came to a screeching halt in the first quarter as investments in business and residential projects struggled.

According to numbers [1] put out by the Commerce Department’s Bureau of Economic Analysis [2] (BEA) Wednesday, real gross domestic product (GDP) grew at an annualized rate of 0.1 percent in Q1, a plunge from the final 2.6 percent growth rate reported for Q4 2013. Economics surveyed by Bloomberg projected a consensus forecast of 1.1 percent growth.

The sudden slowdown reflects in part the toll this year’s winter season took on economic expansion, though not all changes were weather-related. One anticipated decline was in real private inventories, which knocked more than half a percentage point off of GDP growth as business cut down on supplies.

“We really expected the inventories to whack GDP growth fairly significantly,” commented Brendan Lowney, principal and macroeconomist at Forest Economic Advisors [3] (FEA). “They had built up over the past few quarters, and we were due for that correction.”

Also continuing on its downward path was residential fixed investment, which declined at an annual rate of 5.7 percent as homebuilding and sales turned up largely disappointing numbers throughout the year’s opening months.

Not all of Wednesday’s report was negative, however: Personal consumption expenditures, while slower compared to the fourth quarter, still grew at a rate of 3.0 percent, while federal government spending actually contributed to economic growth after a long period of drag.

With other economic indicators showing more positively—in particular employment, which has picked up after a few slow months—analysts don’t expect the early GDP numbers to affect any policymaking at the Federal Open Market Committee’s April meeting, which ends Wednesday. The meeting is expected to end with the announcement of further cuts in the Federal Reserve’s stimulative asset purchases program.

Still, even with two more revisions to Q1 growth scheduled for the coming months, final GDP numbers seem poised to come up short of initial expectations. FEA, which had projected a growth rate of 1.5 percent in the government’s advanced estimate, now expects first-quarter GDP to expand at a rate closer to 1 percent.

Said Lowney: “I would expect the revisions to more likely than not be positive, but it’s still a weak quarter, no matter how you slice it.”