Economy shrinks for first time in 3 years; markets shrug off report

The economy performed worse than initially estimated amid severe winter weather in the first quarter, contracting for the first time in three years. But the stock markets shrugged off the news in early trading.

The Commerce Department said Thursday the nation's total economic output decreased at a 1% annual rate from January through March, down significantly from the government's first estimate of weak, but positive, 0.1% growth for the period.

Recent data indicate that the recovery has picked up this spring.

But the new report shows just how bad things were during the winter and how much ground the economy has to make up to hit the 3% overall growth for 2014 that economists had been hoping for.

"The U.S. recovery took a backward step in the first quarter, most likely the result of many parts of the country having been battered by extreme weather at the start of the year," said Chris Williamson, chief economist at Markit, a financial information firm.

"However, current indicators suggest this was merely a temporary setback in an otherwise ongoing robust recovery, pointing to a strong rebound in the second quarter," he said.

The stock market shrugged off the GDP report in early trading Thursday, with investors betting that the first quarter's inclement weather was a temporary force that wouldn't hold back the economy as the year progressed.

Major stock indexes dipped briefly after the GDP report was issued but quickly bounced back and were sitting on modest gains.

The Standard & Poor's 50 index ticked up slightly to its latest record high. As of 9:15 a.m. Pacific, it was up 0.2%. The Down Jones industrial average was up 24.30 points, or 0.2%.

Bitter cold and heavier-than-normal snowfall in much of the country led economists to anticipate a drop in output in the first quarter. Analysts expected the government's first estimate, released last month, would be revised down on Thursday.

But the falloff was greater than anticipated. The consensus among economists was that the economy contracted at a 0.5% annual rate in the first quarter.

Driving the first-quarter drop in economic output was a larger decline in business investment in inventories than originally estimated.

Private businesses increased their inventories by $49 billion in the first quarter, sharply down from $111.7 billion in the fourth quarter of last year.

Consumer spending stayed about the same as in the first estimate last month, but the 3.1% increase was down from 3.3% in the fourth quarter of the year.

The economy expanded at a 2.6% annual rate in the fourth quarter. The last time output, also known as gross domestic product, contracted was in the first quarter of 2011, when growth was -1.3%.

The first-quarter drop in output was just the second time since the Great Recession ended in June 2009 that the economy contracted. A recession normally is considered two consecutive quarters of negative output.

The economy has improved with the warmer weather, and economists are forecasting growth to accelerate the rest of the year. Federal Reserve policymakers estimate that the economy will expand between 2.1% and 3% for the year.

In a sign of the improvement, initial jobless claims dropped last week by 27,000 to 300,000, the Labor Department said Thursday.

The figure was near the lowest level in seven years, and the number of people receiving unemployment benefits for the week ended May 17, the most recent data available, fell to 2.63 million, the lowest level since November 2007.

This story was first published at 6:35 a.m. and was updated to add the results of early trading.

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