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Revision shows US economy shrank last quarter

Earlier this week, the Standard & Poor’s 500 index hit a fresh high, and the index is up more than 3 percent so far this year.

Richard Drew/AP

Earlier this week, the Standard & Poor’s 500 index hit a fresh high, and the index is up more than 3 percent so far this year.

It was a quarter to forget.

Even as the winter of 2014 fades in the rearview mirror and growth shows signs of picking up, it is becoming clearer just how much the economy slowed in the first quarter.

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The Commerce Department said Thursday the economy shrank at an annual rate of 1 percent in the first quarter, revising its initial estimate last month that showed a very slight gain for the period. It is the first quarter in three years in which the nation’s output of goods and services has contracted.

The bulk of the downward revision in gross domestic product was driven by reduced additions to inventories by businesses as well as a slightly weaker trade balance than first thought. The smaller stockpiles alone subtracted 1.6 percent from the growth rate.

“Ouch,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients immediately after the release of the report. “The bad news is that the headline GDP number is worse than consensus, but the good(ish) news is that almost all the hit is in the inventory component.”

To be sure, lower additions to inventories by businesses in the first quarter suggest that factor won’t weigh on growth as much in the second quarter, when other economic indicators are expected to pick up. Most economists expect the growth rate to rise to 3 to 4 percent in the second quarter.

In a separate economic report from the Labor Department on Thursday, initial claims for unemployment last week dropped more sharply than expected. That suggests the labor market continues to improve, Shepherdson said, a critical factor if the economy is to achieve sustained momentum in the future.

A final revision of the first quarter’s performance will be released June 25.

The on-again, off-again pattern of economic expansion in the current recovery explains why so many Americans remain skeptical that things really are getting better, despite strong corporate profits and a booming stock market.

Earlier this week, the Standard & Poor’s 500 index hit a fresh high, and the index is up more than 3 percent so far this year. In 2013, the S&P 500 rose nearly 30 percent.

Despite the likelihood of a pickup this quarter, economists have been reassessing the prospects for growth during the next year or two, said Michael Hanson, senior U.S. economist at Bank of America Merrill Lynch.

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