American GDP Shrinks 2.9%: US Economy On The Verge of Recession?

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Many analysts were expecting the U.S. economy to contract in the first quarter, however the severity of the decline has shocked some. Revised data points to a 2.9% contraction, far worse than most analysts had predicted. So could the United States be teetering towards a recession, yet again?

Economic indicators are often revised as more and more info and data becomes available. In April, the government released a report stating that the economy had actually expanded by .1 percent. As more data came in economists began to revise the data downwards, with predictions averaging out to a 1.7% decline. The revision from tepid growth to an outright retreat is rather worrisome.

Economy appears to have since rebounded

Most analysts aren’t too worried over the shockingly poor numbers from the first quarter. Since the sharp decline, the economy appears to have rebounded quite dramatically. Hiring is up, the manufacturing sector is reporting is best numbers in four years, and all 12 of the Federal Reserve banks are reporting that the economy is indeed growing.

At the same time, many economists are pointing to the particularly harsh winter as restraining the economy. During the winter some economic activities are constrained. Obviously, farms won’t be in full operation, but also consumers will be less likely to head to the store, movies, or restaurants.


As the weather warms, people tend to head outside and out of their homes more often. And when they do, there’s an increased likelihood of them opening up their wallets. With the summer having finally set in, it does indeed appear that economic activity is picking up. This should bolster growth, though seasons always change and it’s only a matter of months before winter comes around again.

Meanwhile, the economy has added over a million jobs in the last five months. Increased employment generally leads to increased spending, which bolsters economic growth. Economists point out that such hiring generally suggests an economy that is growing between 2 to 3 percent, and certainly not one that is in the midst of a contraction.

All of these factors combined suggest that the economy is growing, at least at the moment. There are numerous other indicators that suggest, however, that the economy is still on weak ground and could fall back into negative territory.

Not all of the data is good

While the United States economy is almost certainly not in recession (as a recession is defined as two quarters of negative growth), not all of the economic indicators look good. While the U.S. economy has been adding jobs, wages are largely stagnant and participation in the work force has actually been shrinking.

Meanwhile, the housing market remains weak. In May, the housing market weakened with new home starts contracting by 6.5 percent. This marked the first decline in 4 months and was far worse than the 3.7 percent predicted decline.

Meanwhile consumer spending decline in April, and although numbers have yet been released for May or June. A consumer sentiments index released by the University of Michigan points to declining consumer confidence. In May, the index declined from a score of 84.1 to 81.9, and the preliminary June reading looks like it will show a further decline to 81.2.

Combined, all of the indicators send a mixed message, at best. Add in the possibility of a the student loan bubble popping, turbulence from the wind down of the Fed’s quantitative easing program, instability in Iraq, and numerous other things, and investors have plenty of things to worry about.

At the same time, China, Europe, and other countries remain on relatively weak footing. Any decline or turbulence in these countries could derail the United States fragile growth. So why there are plenty of reasons to be optimistic, there are also plenty of reasons to be nervous.


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