Recovery, what recovery

GDP worst in 5 years

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 percent annualized rate, more than forecast and the worst reading since the same three months in 2009, after a previously reported 1 percent drop, the Commerce Department said today in Washington. It marked the biggest downward revision from the agency’s second GDP estimate since records began in 1976, owed primarily to a slowdown in health care spending.

Consumers returned to stores and car dealerships, companies placed more orders for equipment and manufacturing picked up as temperatures warmed, indicating the early-year setback was temporary. Combined with more job gains, such data underscore the view of Federal Reserve policy makers that the economy is improving and in less need of monetary stimulus.

“I do not think that the first-quarter GDP report is a reflection of the economy’s underlying health,” Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “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.”

Another report showed orders for durable goods fell 1 percent in May after a 0.8 percent gain. The decrease was the first in four months.

Economists’ Estimates

Economists surveyed by Bloomberg projected a 1.8 percent drop in first-quarter GDP, according to the median of 76 forecasts. Estimates ranged from declines of 0.5 percent to 2.4 percent. The economy expanded at a 2.6 percent 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 percent rate in the second quarter and average 3.1 percent 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 percent after a 2.8 percent gain in the prior year.

Consumer purchases, which account for about 70 percent of the economy, rose at a 1 percent 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 percent.

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 dropped in the first quarter, subtracting 0.16 percentage point from GDP. The Commerce Department previously estimated those outlays added 1 percentage point to GDP.

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