Did the US Economy Contract in Q1?

The latest round of trade data courtesy of the Commerce Department has raised speculation the US economy may have contracted in the first quarter.

The trade deficit narrowed in March from $41.9 billion to $40.4 billion, led by an uptick in exports. However, the narrowing was less than what government economists had forecast when they pieced together the advance estimate of gross domestic product.

March exports rose $3.9 billion over the previous month, while imports were $2.5 billion more than in February, official data showed. Exports of goods increased $3.7 billion to $135.1 billion, while imports of goods increased $3.1 billion to $195.8 billion .Service exports increased $0.2 billion to $58.8 billion, while imports of services decreased $0.7 billion to $38.4 billion.

US gross domestic product was said to have expanded 0.1 percent annually between January and March, according to an initial estimate from the Commerce Department. Today’s report on trade has raised concern the US economy backtracked in Q1, a sign the adverse weather played an even bigger role than economists had initially anticipated.

Combined with previous reports on inventories and construction, the latest trade figures suggest the US economy contracted at a 0.5 percentage-point annualized pace in the first quarter.

The slowdown in the economy is likely to be short-lived, however. The US economy is set to rebound strongly in the second quarter, as warm weather releases pent-up demand. Consumer spending is expected to ramp up sharply this season amid signs the labour market is recovering. US employers added 288,000 private payrolls last month. shifting the three-month average to 238,000. March payrolls were revised upward from 192,000 to 203,000.

The unemployment rate fell to 6.3 percent as the labour force participation rate dropped. The number of long-term unemployment declined at the fastest pace in two-and-a-half-years, official data showed.

Based on April PMI data, the US economy is on pace to expand 2.5 percent annually in the second quarter, according to Markit chief economist Chris Williamson. Other estimates show the US economy is poised to rebound by as much as 3.7 percent between April and June. The International Monetary Fund has benchmarked US growth at 2.8 percent this year. By comparison, the UK economy is forecast to grow 2.9 percent and Canada 2.3 percent.

Revised US GDP figures from the government are set for release May 29.

Weaker than forecast GDP growth did not deter the Federal Reserve from continuing to reduce the pace of monthly asset purchasing. However, it may have given policymakers more reason to keep interest rates near zero. Federal Reserve Chair Janet Yellen may attempt to shed light on the Fed’s rate outlook Wednesday when she testifies before the Joint Economic Committee of the US Congress.