U.S. economy stumbles in first quarter as weather, low energy prices weigh

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U.S. Economic Growth Nearly Stalls Out

(Reuters) - U.S. economic growth nearly stalled in the first quarter as harsh weather dampened consumer spending and energy companies struggling with low prices slashed spending.

Gross domestic product expanded at an only 0.2 percent annual rate, the Commerce Department said on Wednesday. That was a big step down from the fourth quarter's 2.2 percent pace and marked the weakest reading in a year.

A strong dollar and a now-resolved labor dispute at normally busy West Coast ports also slammed growth, the government said.

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U.S. economy stumbles in first quarter as weather, low energy prices weigh
Specialist John Parisi, left, looks toward a television screen that shows the decision of the Federal Reserve, on the floor of the New York Stock Exchange, Wednesday, April 29, 2015. The Federal Reserve has downgraded its assessment of the economy after a winter in which growth nearly stopped. The Fed offered no sign that a rate increase might be coming soon. (AP Photo/Richard Drew)
Graphic shows quarterly annualized rate of economic growth.; 1c x 3 inches; 46.5 mm x 76 mm;
NEW YORK, NY - APRIL 29: Traders work on the floor of the New York Stock Exchange (NYSE) on April 29, 2015 in New York City. U.S. stocks closed down over 70 points on Wednesday as investors remained on cautious amid mixed earnings reports. (Photo by Spencer Platt/Getty Images)
NEW YORK, NY - APRIL 29: Traders work on the floor of the New York Stock Exchange (NYSE) on April 29, 2015 in New York City. U.S. stocks closed down over 70 points on Wednesday as investors remained on cautious amid mixed earnings reports. (Photo by Spencer Platt/Getty Images)
NEW YORK, NY - APRIL 29: Traders work on the floor of the New York Stock Exchange (NYSE) on April 29, 2015 in New York City. U.S. stocks closed down over 70 points on Wednesday as investors remained on cautious amid mixed earnings reports. (Photo by Spencer Platt/Getty Images)
NEW YORK, NY - APRIL 29: Traders work on the floor of the New York Stock Exchange (NYSE) on April 29, 2015 in New York City. U.S. stocks closed down over 70 points on Wednesday as investors remained on cautious amid mixed earnings reports. (Photo by Spencer Platt/Getty Images)
NEW YORK, NY - APRIL 29: Traders work on the floor of the New York Stock Exchange (NYSE) on April 29, 2015 in New York City. U.S. stocks closed down over 70 points on Wednesday as investors remained on cautious amid mixed earnings reports. (Photo by Spencer Platt/Getty Images)
NEW YORK, NY - APRIL 29: Traders work on the floor of the New York Stock Exchange (NYSE) on April 29, 2015 in New York City. U.S. stocks closed down over 70 points on Wednesday as investors remained on cautious amid mixed earnings reports. (Photo by Spencer Platt/Getty Images)
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While there are signs the economy is pulling out of the soft patch, the lack of a vigorous growth rebound has convinced investors the U.S. Federal Reserve will wait until late this year to start hiking interest rates.

The recovery is the slowest on record and the economy has yet to experience annual growth in excess of 2.5 percent.

"The U.S. economy has yet to demonstrate the self-sustaining resilience that the Fed wants to see before raising interest rates," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "A June liftoff is now off the table, our forecast for a September move holds but even that has become tenuous."

Fed officials at the end of their two-day policy meeting on Wednesday acknowledged the softer growth, but shrugged it off as "in part reflecting transitory factors."

The dollar hit a nine-week low against a basket of currencies. Prices for U.S. Treasury debt fell in line with a global bond sell-off, sparked by a poorly received five-year German bond auction. U.S. stocks were trading lower.

Economists had expected the economy to expand at a 1.0 percent rate. The sharp growth slowdown is probably not a true reflection of the economy's health, given the role of temporary factors such as the weather and the ports dispute.

"The extent and depth of the weakness in today's GDP report, sets the U.S. up for another disappointing though somewhat better GDP report in the second quarter. We are not ready to throw in the towel for the year," said Scott Anderson, chief economist at Bank of the West in San Francisco.

HIBERNATING CONSUMERS

The economy has had a jerky recovery from the 2007-2009 financial crisis, with the first quarter marking only the latest setback. The government did not quantify the impact of the weather, the strong dollar, lower energy prices and the ports disruptions on growth last quarter.

Economists, however, estimate unusually cold weather in February chopped off as much as half a percentage point, with the port disruptions shaving off a further 0.3 percentage point.

The weather impact was evident in weakness in consumer spending. Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.9 percent rate. That was the slowest in a year and followed a brisk 4.4 percent pace in the fourth quarter.

The sharp moderation in consumer spending came even though households enjoyed huge savings from a big drop in gasoline prices. Consumers boosted their savings to $727.8 billion from $603.4 billion in the fourth quarter, which should provide a tailwind for future consumer spending.

Construction also took a hit, while lower energy prices, which have cut into domestic oil production, undermined business investment.

Spending on nonresidential structures, which includes oil exploration and well drilling, tumbled at a 23.1 percent rate. That was the fastest pace of decline in four years and the first contraction since the first quarter of 2013.

The decline was driven by mining exploration, shafts and wells investment, which plunged at a 48.7 percent pace.

Nonresidential structures lopped off 0.75 percentage point from growth.

Schlumberger (SLB.N), the world's No. 1 oil-field services provider, has slashed its capital spending plans for this year by about $500 million to $2.5 billion, while competitor Halliburton (HAL.N) cut its by about 15 percent to $2.8 billion.

Economists believe the bulk of the spending cuts were front-loaded into the first quarter, and they expect they will present less of a drag on growth in the April-June quarter.

"The weakness in business investment in response to the oil price shock may be transitory, but we continue to have doubts that the next leg of faster investment will kick in if GDP growth, especially consumer demand, does not improve significantly," said Dana Peterson, an economist at Citigroup in New York.

The dollar, which gained 4.5 percent against the currencies of the United States' main trade partners in the first quarter, weighed on trade, as did the West Coast ports dispute. Trade subtracted 1.25 percentage points from first-quarter growth.

There was a surprise increase in inventory accumulation, which added 0.74 percentage point to GDP growth.

Inventories increased $110.3 billion, the largest gain since the third quarter of 2010 and one that suggests inventories will weigh on growth in the second quarter.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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