Why a grim US economic picture is brightening

By Martin Crutsinger

Associated Press

Published: Tuesday, June 24 2014 1:13 p.m. MDT

Updated: Tuesday, June 24 2014 1:13 p.m. MDT

FILE - In this Tuesday, Jan. 7, 2014, file photo, a salesmen at a car dealer digs out cars covered in snow at a dealership in Indianapolis, as temperatures hovered around zero. The blast of Arctic chill and snow during the first quarter of 2014 shuttered factories, disrupted shipping and kept Americans away from shopping malls and car dealer lots.

Michael Conroy, File, Associated Press

WASHINGTON — When the government updates its estimate Wednesday of how the U.S. economy fared last quarter, the number is pretty sure to be ugly. Horrible even.

The economy likely shrank at an annual rate of nearly 2 percent in the January-March quarter, economists estimate. That would be its bleakest performance since early 2009 in the depths of the Great Recession.

So why aren't economists, businesses or investors likely to panic?

Because most agree that the economy last quarter was depressed by temporary factors — particularly the blast of Arctic chill and snow that shuttered factories, disrupted shipping and kept Americans away from shopping malls and auto dealerships.

Since then, the picture has brightened. Solid hiring, growth in manufacturing and surging auto sales have lifted the economy at a steady if still-unspectacular pace. That said, sluggish pay growth and a stumbling housing rebound have restrained the expansion. But the economy's recovery continues.

"We had a very bad first quarter, but the first quarter is history," says Craig Alexander, chief economist at TD Bank. "It doesn't tell you where the economy is going, which is in a direction of more strength."

Wednesday's report will be the government's third and final estimate of the economy's first-quarter performance. Here are five reasons economists are looking past last quarter's dismal showing and five reasons the economy still isn't back to full health.

HIRING IS ROBUST

If the economy really was tumbling back into recession, you'd see businesses laying off workers — or at least clamping down on hiring. That isn't happening. Employers are adding jobs at the fastest pace in 15 years. That's a pretty clear sign that they see last quarter's troubles as temporary. And layoffs are down. The number of people seeking unemployment benefits, a proxy for layoffs, has fallen 10 percent since the first week of January.

WINTER BLAST

With summer in full swing, it might be hard to remember the brutal winter. But the cold damaged the economy last quarter. Spending on autos, furniture, clothes and other goods rose at the slowest pace in nearly three years. With snow blanketing building sites, home construction plummeted in January. Alexander estimates that winter weather slowed economic activity by about 1.5 percentage points on an annual basis.

Yet the impact didn't reflect fundamental problems in the economy. Americans who postponed car purchases during winter simply bought cars during spring instead. Auto sales jumped to a nine-year high in May.

CLEARING OUT STOCKPILES

Another drag on growth last quarter was probably also temporary: Companies sharply cut back on their restocking of goods. That wasn't unexpected. It occurred after companies had aggressively ramped up restocking in the second half of last year. The slowdown in the January-March quarter reduced annual growth by 1.6 percentage points, the government said. With growth strengthening since spring began, businesses are restocking at a faster rate again. Inventories grew 0.6 percent in April, the most in six months.

HEALTH CARE COMPLICATIONS

Last quarter's economy will look bleak in part because the government needs to correct a mistaken assumption. It previously figured that health spending soared last quarter after many Americans obtained insurance on the Obama administration's health care exchanges. But when data was released this month, there was no sign of such additional spending.

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