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A chillier economy greeted with a shrug

Output fell last quarter; hopes continue to rise

NEW YORK — 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 that the economy shrank at an annual rate of 1 percent in the first quarter, revising its initial estimate last month, which 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 percentage points from the growth rate.

“Ouch,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said 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.”

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To be sure, smaller 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 at an annual rate of 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.

“This report is more important than the GDP numbers, in our view, because it strongly supports the idea that labor market conditions are improving markedly, despite weak headline growth during the winter,” Shepherdson added.

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

Other experts agreed that although the first-quarter contraction represents a serious pothole, especially for people looking for work or forced into part-time employment because full-time positions are unavailable, it doesn’t suggest a recession is on the horizon.

“The first-quarter numbers shouldn’t be read as a bad omen of a much weaker economy in the spring and summer,” said Stuart Hoffman, chief economist at PNC Financial Services. “It coils the spring even more for a bounce-back in the economy this quarter.”

Hoffman, who is expecting the economy to expand at a rate of 4 percent in the second quarter, attributes much of the weakness in inventory growth last quarter to slower auto production and sales in early 2014. He noted that auto sales picked up in March and April, and he said new data for May car sales due next week should also be encouraging.

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