US Economy Shrank in First Quarter

The US economy shrank 0.7% in the first three months of 2015, compared to the same period last year.The Bureau of Economic Analysis significantly revised down its earlier economic growth estimate of 0.2%.

US economy shrank in first quarter

The previous calculation underestimated the rise in the volume of imported goods and overestimated capital investment by companies, it said.

The US economy last contracted in the first quarter of 2014, when it shrank by 2.1%.

As was the case last year, a harsh winter may have been partly to blame for falling goods and services production in the US.

Consumer spending, which accounts for about 70% of economic activity, slowed to 1.8% growth in the first quarter, slightly below the 1.9% growth initially estimated.

The Bureau also highlighted the impact of weak exports and government spending.

‘Second quarter pick-up’

The strong US dollar has pushed up imports and lowered exports. At current dollar prices, GDP slipped further from 0.1% growth to a 0.9% contraction.

The revision in GDP prompted investors to shift to traditionally safer assets, such as bonds. This is why yields on US Treasuries have fallen as their price has risen.

GDP figures are closely watched by investors, as the Federal Reserve makes decisions based on the health of the economy.

“From a policy perspective, the first quarter lull is already history; it’s the extent of the rebound that will be critical in determining the timing of the Fed’s first move on interest rates,” says Chris Williamson, chief economist at Markit.

“Survey evidence is already pointing to a second quarter pick-up,” he added.

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