'Recovering' U.S. Economy Unexpectedly Shrinks by 1 Percent

The last economic contraction was during the first quarter of 2011.

We know that…err…certain things shrink on contact with the cold, and the winter is among the factors being blamed for an unexpected 1 percent contraction in U.S. Gross Domestic Product (GDP). After healthy growth in the fourth quarter of 2013, a slight slowdown was expected at the beginning of 2014, but the downturn caught economists by surprise. The last economic contraction was during the first quarter of 2011.

Today, the U.S. Department of Commerce's Bureau of Economic Analysis announced:

Real gross domestic product – the output of goods and services produced by labor and property located in the United States – decreased at an annual rate of 1.0 percent in the first quarter according to the "second" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.6 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, real GDP was estimated to have increased 0.1 percent. With this second estimate for the first quarter, the decline in private inventory investment was larger than previously estimated.

The Commerce Department announcement attributed the downturn, in part, to low inventory investment by private business, exports, slow nonresidential construction, and reduced state and local government spending.

Government spending boosts GDP measures, even though it represents money taken from taxpayers, rather than economically productive activity.

Some independent economists consider this a temporary chill.

"Severe weather conditions had a deeper impact on first quarter economic activity than previously estimated," according to Robert Hughes, a senior research fellow at the American Institute for Economic Research. He anticipates that "much of the weakness will likely result in pent-up demand and should reverse in the second quarter."

While economists say it's uncommon for GDP to shrink outside a recession, it's not unknown, and not necessarily a sign of a larger problem. Definitions of recession vary, with two consecutive quarters of contraction often used as an indicator. The National Bureau of Economic Research simply says that "a recession is a significant decline in economic activity spread across the economy, lasting more than a few months."

But there's no doubt that recovery from the Great Recession has been sluggish, with unemployment remaining a nagging problem, exacerbated by the the labor force participation rate declining to the lowest levels seen since 1978 (see graph below).

Proposals to hike the minimum wage, politically popular in some circles, have triggered warnings that rising labor costs could further depress hiring and economic activity. Some businesses, including restaurants, have already responded to the threat of such costs by automating tasks that are traditionally performed by people. That should prove a boon to the companies that are able to control their costs, but whether it signals growth or further shrinkage for the larger economy is an open question.