US economy shrinks 0.7% in first quarter as strong dollar eats into growth

A harsh winter, a strong dollar and falling oil prices took their toll on the US economy in the first quarter, the Commerce Department revealed on Friday.

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US gross domestic product (GDP) – the broadest measure of economic growth – shrank at an annualized rate of 0.7%. The Commerce Department had previously estimated output grew 0.2% from January through March.

The quarterly economic decline is the first since the economy shrank by an even sharper 2.1% annual rate in the first quarter of 2014. A bleak winter also contributed to that decline as consumers stayed home and some businesses closed.

Business investment fell at a 2.8% pace and exports declined 7.6%, hurt by the strength of the dollar. Consumer spending, which accounts for more than two-thirds of economic output, grew by 1.8% on an annual basis. In the fourth quarter – traditionally the best quarter for consumer spending – it grew 4.4%.

The dip was widely in line with economists predictions and is expected to be temporary. Economists are expecting GDP to grow at a roughly 2% pace in the current quarter.

The GDP decline is unlikely to change thinking at the Federal Reserve, which is considering its first hike in interest rates since the 2008 economic crisis. The Fed chairwoman, Janet Yellen, has said she expects interest rates to rise this year.

In a speech last week Yellen said that if the US economy continues to strengthen, “it will be appropriate at some point this year to take the initial step to raise the federal funds rate”.

However, she cautioned the market not to expect any rapid increase in rates. “After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual,” she said in a speech in Rhode Island.

Powered by article was written by Dominic Rushe in New York, for on Friday 29th May 2015 14.32 Europe/ © Guardian News and Media Limited 2010


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