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What recovery? The U.S. economy shrunk in the first quarter

May 29, 2015, 1:20 PM UTC
U.S. Oil Workers Threaten To Expand Strike To California Port
Ships wait to unload cargo in this aerial photograph taken above the Port of Los Angeles in Los Angeles, California, U.S., on Wednesday, Feb. 18, 2015. United Steelworkers members who help run crude terminals at a California port are threatening to join a national oil workers' strike at U.S. refineries. Photographer: Patrick T. Fallon/Bloomberg via Getty Images
Photograph by Patrick T. Fallon — Bloomberg via Getty Images

U.S. Economy-watchers are suffering from a feeling of deja-vu Friday morning, as the Commerce Department announced that the U.S. economy shrank by 0.7% in the first quarter of 2015, revising down their initial estimate that the economy grew by 0.2%. This mirrors the first quarter of 2014, when economists were surprised to find the economy shrank by a whopping 2.1%.

The major difference between the initial reading last month and today’s estimate was news that the trade deficit increased in March by the largest amount since since 1999. The biggest contributor to this deficit was trade with China, where America’s bilateral trade-gap reached an all-time high.

The numbers in the U.S. mirror those of economies thought to be in more trouble, like Greece, where data confirm the nation has once again slipped back into recession. Same for Brazil, where the economy contracted by 0.2% in the first quarter, though this reading was better than economists had expected. It contrasts sharply with the Indian economy–now the fastest growing large economy in the world, which grew at 7.5% clip in the first quarter.

Most economists expect the economy to bounce back from this setback, just as it had last year. After the GDP decline in the first quarter of 2014, the economy recovered in a big way, growing 4.6% and 5.0% in the second and third quarters respectively. Jim O’Sullivan, Chief U.S. Economist with High Frequency Economics argued in a research note to clients, that other data–like strong job growth and tame jobless claims–bolster the theory that the first quarter numbers is just a bump in the road to overall healthy growth in 2015.

Fed Chair Janet Yellen agrees with this assessment. In a speech last week, she argued the first quarter slow-down was due to “transitory factors,” like, “the unusually cold and snowy winter and the labor disputes at ports on the West Coast which likely disrupted economic activity.”

Other analysts aren’t so sure. Jim Bianco of Bianco Research has wondered, given steadily weakening GDP numbers, a depressed energy market, and weak retail sales, that we should be skeptical of positive employment numbers rather than the GDP reading. Says Bianco, “We suspect something might be amiss with the payroll numbers. These numbers are telling us a far different narrative [than] most other economic data.”