WASHINGTON: The US economy contracted in the first quarter for the first time in three years as it buckled under the weight of a severe winter, but there are signs activity has since rebounded.

The Commerce Department on Thursday slashed its estimate of gross domestic product to show the economy shrank at a 1.0 per cent annual rate.

The worst performance since the first quarter of 2011 reflected a far slower pace of inventory accumulation and a bigger than previously estimated trade deficit. Both are temporary factors which should fade and unleash a surge in growth this quarter.

“The race isn’t over yet for the economy. We are still expecting a strong finish to the year. Inventory levels will rebuild, pushing GDP to nearly 4pc in the second quarter,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

GDP was initially estimated to have grown at a 0.1pc rate. It is not unusual for the government to make sharp revisions to GDP numbers as it does not have complete data when it makes its initial estimates.

The decline also reflected a plunge in business spending on nonresidential structures. The economy grew at a 2.6pc pace in the fourth quarter.

Investors shrugged off the report. US stocks opened higher, with the Standard & Poor’s 500 index hitting a record high. Prices for US Treasury debt were up, while the dollar was little changed against a basket of currencies.

Economists estimate severe weather could have chopped off as much as 1.5 percentage points from GDP growth. The government, however, gave no details on the impact of the weather.

Other data on Thursday from the Labour Department showed first-time applications for state unemployment benefits declined 27,000 to a seasonally adjusted 300,000 last week.

The four-week moving average for new claims, a better measure of underlying labour market conditions, hit its lowest level since August 2007.

Separately, pending contracts to buy previously owned homes rose in April for a second month, a positive sign for the troubled housing market. The reports added to data on manufacturing and hiring that have buoyed hopes of a strong rebound in growth in the second quarter.

Businesses accumulated $49.0 billion worth of inventories in the first three months of the year, far less than the $87.4bn estimated last month.

It was the smallest amount in a year and left inventories subtracting 1.62 percentage points from first-quarter growth. While the decline in exports was not as severe as initially thought, import growth was stronger. That resulted in a trade deficit that sliced off 0.95 percentage point from GDP growth.

Published in Dawn, May 30th, 2014