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6/25/2014 8:55:00 AM Write a Letter to the Editor Write a letter to the Editor

Economy Shrank in First Quarter by Most in Five Years


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The U.S. economy contracted in the first quarter by the most since the depths of the last recession as consumer spending cooled.

Gross domestic product fell at a 2.9% annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1% drop, the Commerce Department reported. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976. It was due primarily to a slowdown in health-care spending.

“I do not think that the first-quarter GDP report is a reflection of the economy’s underlying health,” said Russell Price, senior economist at Ameriprise Financial Inc. “The employment numbers have been pretty solid, we’ve seen early signs of growth in wages, and that is really what’s going to drive demand. That will bring the rest of the economy with it.”

Economists surveyed by Bloomberg News projected a 1.8% drop in first-quarter GDP, according to the median of 76 forecasts. Estimates ranged from declines of 0.5% to 2.4%. The economy expanded at a 2.6% pace in the final three months of 2013.

This marked the last of three readings for the quarter. The advance estimate of second-quarter GDP is scheduled for July 30.

The economy will expand at a 3.5% rate in the second quarter and average 3.1% in last half of the year, according to the median projection economists surveyed by Bloomberg from June 6 to June 11. For all of 2013, the economy expanded 1.9 % after a 2.8% gain in the prior year.

Consumer purchases, which account for about 70 % of the economy, rose at a 1% annualized rate in the first quarter, the weakest pace in five years. The gain, which added 0.71 percentage point to GDP, compared with the previous estimate of 3.1%.

The revision reflected a drop in spending tied to health-care services. The Bureau of Economic Analysis had estimated that major provisions of President Obama’s signature health-care law would boost outlays. A quarterly services survey released this month showed the assumptions were too optimistic.

Outlays for health spending actually slowed in the first quarter, subtracting 0.16 percentage point from GDP. The Commerce Department previously estimated those outlays added 1 percentage point to GDP.

By Bloomberg News

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