GDP growth slowed to 0.5 percent rate in first quarter

Last Updated Apr 28, 2016 9:20 AM EDT

WASHINGTON -The U.S. economy inched forward at the weakest pace in two years from January through March, as consumer spending growth slowed, business investment plunged and exports declined further.

The gross domestic product, the broadest measure of economic health, grew by a tiny 0.5 percent in the first quarter, the Commerce Department reported Thursday. That is down from 1.4 percent growth in the fourth quarter.

The January-March performance was the poorest showing since GDP contracted by 0.9 percent in the first three months of 2014.

Ian Shepherdson, chief economist at Pantheon Macroeonomics, said the GDP report "looks grim, but the second quarter will be much better."

Since this recovery began almost seven years ago, GDP has been weak in the first quarter each year only to rebound in the spring. Economists are looking for a similar pattern this year, forecasting second quarter growth of around 2 percent.

The year got off to a rocky start, with troubles in China causing a nosedive in global financial markets. A steep plunge in oil prices have also triggered more cutbacks in the U.S. energy sector.

The headwinds led economists to slash their forecasts for first quarter growth, and the Federal Reserve slowed its pace for raising interest rates.

For the first quarter, consumer spending, which accounts for 70 percent of economic activity, grew at a 1.9 percent rate. That's down from 2.4 percent in the fourth quarter and the weakest showing in a year.

Business investment dropped at a 5.9 percent rate, the biggest quarterly plunge since the depths of the recession in 2009. The decline was led by a record 86 percent plunge in the category that covers oil and gas exploration. U.S. energy companies have cut back sharply in response to falling global oil prices.

Adding to the weakness, the rise in the value of the dollar over the past year hurt exports and drove up the trade deficit. The higher deficit subtracted 0.3 percentage point from growth in the first quarter. A further slowdown in business spending to restock their store shelves also trimmed 0.3 percentage point from growth in the first quarter.

The Federal Reserve, wrapping up two days of discussion on Wednesday, took note of weak spots in the U.S. economy and decided for the third straight meeting to keep its key policy rate unchanged in a range of 0.25 percent to 0.5 percent. The Fed said that "economic activity appears to have slowed," citing a moderation in consumer spending and weakness in business investment and exports.

The Fed, which raised rates by a quarter-point in December, gave no hint on when it might raise rates again and many economists are pushing back their own expectations which had predicted a rate hike in June. Now some say they expect the Fed to wait until September or perhaps December before hiking again.

The first quarter slowdown followed by a second quarter rebound has become a regular feature of this economic expansion, which began in June 2009.

GDP growth has averaged a paltry 0.8 percent in the first quarter over the past six years while second quarter growth has averaged 3.1 percent, nearly four times faster.

Forecasters are projecting the first quarter weakness will be followed by a rebound in the current April-June quarter although they are not expecting as big a bounce back as some years in part because of the headwinds currently facing the economy.

Mark Zandi, chief economist at Moody's Analytics, is forecasting second quarter GDP growth of 2.8 percent and around 2.8 percent growth in the second half of this year, For the entire year, he is looking for the economy to expand 2.1 percent, slightly below the 2.4 percent growth turned in during 2014 and 2015 but right in line with the average for this recovery, which has featured sub-par growth rates.