The U.S. economy suffered its worst quarter in five years at the start of 2014, figures released Wednesday show.
The world’s largest economy shrank at an annualized rate of 2.9 percent during the first three months of the year, according to the final revision of gross domestic product figures from the U.S. Commerce Department.
A fall in household consumption tumbled and a sharp revision of health care expenses contributed to the drop.
The report caught most Wall Street analysts by surprise. The economy has been expected to show a 1.9 per cent decline on the previous quarter.
Wednesday’s numbers were the second downward revision to the GDP data. The first preliminary estimates in April pointed to a 0.1 percent increase.
The decrease in real GDP reflected a drop in private investment; exports; and state and local government spending.
The severe winter in America contributed to weakness in the first and second GDP estimates but it was not behind the downward revision, the report said. The decline was driven in part by overly optimistic assumptions about household spending on the ‘Obamacare’ health care plan, analysts explained.
The weaker-than-expected report sent stock markets falling around the world. But on Wall Street, the benchmark S&P500 index rebounded after a weak opening to trade higher on the day, up 0.3 per cent and near previous highs.
Analysts said that in spite of the sharp decline in first quarter GDP figures, the economy has since showed signs of a recovery.
“This was a weak report, there are no two ways about it,” Michael Woolfolk, global markets strategist at Bank of New York Mellon, said in a note to clients. “What was taken away in the first quarter will be largely given back in the second quarter.”
Earlier this week, reports on the housing market showed new homes in the U.S. are selling at the fastest pace since 2008. Last month previously-owned homes posted their largest sales increase in three years.
In addition, consumer confidence, manufacturing, the service sector and the labor market have all gained shown an upturn in recent weeks.
Federal Reserve Bank policy makers have cited recent signs of improvement as a justification for gradually reducing monetary stimulus to the economy, known as ‘the taper’.
Forecasts from last week’s Fed monetary policy meeting show 12 officials believe the bank will end its current near-zero short-term rate policy sometime in 2015.
"Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter," Chairwoman Janet Yellen said last week.
Most Fed officials see short-term rates at two percent or lower by the end of next year.