US economy goes into reverse as fears grow over recovery

The American economy went into reverse in the first three months of the year, new figures reveal, stoking fears that the US recovery is still much more fragile than hoped.

Officials had thought that US Gross Domestic Product (GDP) grew by the miserly equivalent of 0.1pc a year in the first quarter, but revised figures released on Thursday showed it had actually shrunk by the annual equivalent of 1pc – the first time it has reversed in three years.

The contraction marks a startling change from the previous two quarters, when the economy grew at the annual equivalents of 2.6pc and 4.1pc respectively.

The fall is also much sharper than expected. Economists were prepared for the 0.1pc figure to be revised downwards, but most thought the world’s largest economy had shrunk by around 0.4pc, according to consensus figures compiled by Bloomberg.

“The US recovery took a backwards step in the first quarter, most likely the result of many parts of the country having been battered by extreme weather,” said Chris Williamson, chief economist at Markit. “However, current indicators suggest this was merely a temporary setback in an otherwise robust recovery, pointing to a strong rebound in the second quarter.”

The likely rebounded has immediately fuelled expectations that the US Federal Reserve could raise interest rates before the summer.

Economists said America’s unusually bitter winter kept consumers away from the shops and made companies hesitant about making large capital outlays. The revised figures showed businesses were even more unnerved than first thought. Business spending fell by 1.6pc, including a 7.5pc drop in outlays on office buildings.

Companies also spent less on stockpiling “inventory”, or goods to sell further down the line, as they sold off products they had already hoarded in the previous two quarters. However, the backlog was not as bad as feared.

There were also some bright spots to the harsh conditions, as people paid more for housing and utilities such as heating. They also dramatically increased spending on healthcare, as they hurried to enroll on President Obama’s flagship Affordable Care Act – adding the equivalent of a full percentage point to annualised GDP.

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