U.S. GDP Shows Contraction; What Now?

On Friday, the U.S. Commerce Department
released
a revised report of the nation's first quarter GDP, which showed that America's economy shrank by 0.7 percent from January to March.

The figure gave markets cause for concern as it suggests that the U.S. economic recovery may not be as strong as previously believed; however, on the other hand, it may postpone the Federal Reserve's dreaded rate hike, a positive for traders.

What Happened?

The contraction was likely the product of several factors including a stronger U.S. dollar, weather concerns and more cautious consumers. In April, the Fed released a statement explaining the nation's weaker than expected growth claiming that "transitory factors," like weather, were to blame.

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Can The U.S. Overcome?

Some factors that stifled growth, like a strong dollar, are unlikely to change as the year progresses. U.S. firms have found it difficult to compete in the global marketplace as their products became more expensive than foreign rivals' offerings.

However, the Fed expects that businesses will find ways to overcome these challenges and the U.S. economy will continue to recover in the coming months.

History Repeats Itself?

Last week, the Commerce department pointed out that first quarter GDP is typically much lower than GDP figures for the other three quarters of the year. The pattern, called residual seasonality, has been evident since 1995 and could result in the Bureau of Economic Analysis changing up the way it calculates quarterly GDP. The Bureau has said it is working to revise its statistical models in order to account for factors that keep first quarter GDP low.

Despite that

, the figure is still worrying as an adjustment to the calculation would simply take away from GDP in other quarters, meaning annual GDP wouldn't change. If the U.S. struggles to grow in any quarter, it will drag down the nation's overall GDP no matter how you slice it.

Image Credit: Public Domain
Posted In: Top StoriesMarketsBureau of Economic AnalysisGDPU.S. Comerce Department
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