US economy shrank 0.7% in first quarter

The US economy contracted 0.7 percent in the first quarter of 2015, with the impact of a ports slowdown and cautious consumer spending worse than originally estimated.

The Commerce Department's revised estimate of gross domestic product Friday confirmed the stall in the first three months of the year, which had raised worries about the underlying strength of the world's largest economy six years after the Great Recession.

Economists had expected a sharp reduction in the original estimate of a 0.2 percent annual pace of growth, as more detailed data has trickled out in recent weeks.

But the poorer numbers for the January-March period also supported what Federal Reserve economists have pinpointed as largely "transitory" reasons for the downturn, leading to expectations of a firm rebound in the current quarter.

The slowdown from a 2.2 percent pace of growth in the 2014 fourth quarter was due in large part to the impact on trade of the three-month West Coast ports slowdown that ended in February, and the loss of competitiveness of US exports due to the stronger dollar.

Overall, net trade had a negative 1.9 percent impact on GDP. Exports fell 7.6 percent in the quarter, after growing 4.5 percent the previous period. Meanwhile, imports rose 5.6 percent, just over half the pace of the previous quarter.

In addition, private inventory investment by businesses was lower than previously estimated. And other key drivers of growth were weak: personal consumption, business investment, and government spending.

Some of that is also linked to extremely harsh winter weather than swept large parts of the country during the period, stifling business and consumer activity, especially construction.

On the bright side, spending on houses and business equipment improved in the quarter.

- Q2 rebound expected -

The second winter quarter stall in two years has supported continued doubts over the overall strength of the US economy.

Yet early data for the period since April is generally better, raising hopes for a firm rebound. The trade backlog is mostly cleared up; housing sales have strengthened; and job creation is solid, even if wages remain flat.

"This was not a good picture of the US economy but it is all history," said Jennifer Lee of BMO Capital Markets.

"We are more than halfway through Q2 and we are seeing signs that the economy is recovering."

There is still some worry that US consumers are still being cautious and not spending the windfall gains from sharply lower gasoline prices.

But indications from the tourism industry suggest that consumers are preparing to let loose in the summer holiday season.

"The transitory conditions that depressed first quarter growth will reverse in the second quarter with more normal weather and as the effects of the port disruptions diminish," said Nariman Behravesh, chief economist at IHS.

"We expect consumer spending to accelerate somewhat in the second quarter with more normal weather."

Markets took the downgrade to the GDP estimate in stride, reacting more to fresh data releases showing a downturn in consumer confidence this month and a slowdown in business activity in the Chicago region.

The broad-based S&P 500 lost 0.6 percent, but remained close to Wednesday's record, while the dollar edged 0.2 percent higher against the euro to $1.097.