U.S. economy barely expands at 0.2% pace in Q1

The U.S. economy skidded to a near halt in the first three months of the year, battered by a triple whammy of harsh weather, plunging exports and sharp cutbacks in oil and gas drilling.

The overall economy grew at a barely discernible annual rate of 0.2 per cent in the January-March quarter, the Commerce Department reported Wednesday. That is the poorest showing in a year and down from 2.2 per cent growth in the fourth quarter.

The government's first look at economic growth for the first quarter, as measured by the gross domestic product, came as the Federal Reserve wrapped up two days of discussions on interest rate policies. While the economy can brush off the temporary factors behind the slowdown, it will have to contend with ongoing challenges like the strong dollar for some time.

"A stalling of U.S. economic growth at the start of the year rules out any imminent hiking of interest rates by the Fed," Chris Williamson, chief economist at Markit, wrote in a research report.

Exports plummet

Plummeting exports dragged grown by nearly a full percentage point. The category that includes investments in oil and gas exploration plunged 48.7 per cent. Consumer spending slowed sharply as a severe winter kept shoppers home.

The first quarter figure was much worse than economists had expected. But analysts are still looking for a solid rebound for the rest of the year, similar to what happened in 2014.

The economy contracted in the first three months of 2014, also due to a harsh winter. It was then followed by a strong rebound to growth of 4.6 percent in the spring and a jump of 5 percent in the third quarter.

Dan Greenhaus, chief strategist at BTIG, believes the first quarter will prove to be the year's low point, though acknowledges that the momentum so far isn't as strong as last year.

"Admittedly, the data does not yet support the type of snapback seen in 2014 but more growth is better than less and we expect that to occur this year," he said in a note to clients.

The economy is being hurt by the rising value of the dollar, which makes exports more expensive on overseas markets and imports more attractive to U.S. consumers. For the first quarter, a widening trade deficit subtracted 1.25 percentage points from growth, with nearly 1 percentage point of the damage coming from a big drop in exports.

Consumer spending slows down

Business investment spending on equipment and structures fell at a 3.4 per cent annual rate, in large part reflecting the nearly 49 per cent drop in the category that includes oil and gas drilling. Energy companies have cut investments back sharply in response to the fall in oil prices over the past year.

Consumer spending, which accounts for 70 per cent of economic activity, decelerated to a rate of just 1.9 per cent in the first quarter, down from a 4.4 per cent surge in the fourth quarter. It was the weakest gain in a year.

The Fed is expected to acknowledge the first quarter economic slowdown in the statement it issues later Wednesday.

At the Fed's March meeting, the central bank opened the door to a rate increase this year by no longer saying it would be "patient" in moving to raise interest rates. While economists had thought the change could mean the Fed might hike rates for the first time at the June meeting, the view now is that the weaker economic activity has pushed off the first rate increase until at least September.

Many economists forecast growth to rebound to around 3 percent in the current quarter and hold steady in the second half of the year. The International Monetary Fund earlier this month projected that the U.S. economy would grow 3.1 percent this year. While that is a half-point lower than its January forecast, it would still give the United States the strongest annual growth since 2005.

The Great Recession ended nearly six years ago in June 2009, but growth since the recovery began has been sub-par, averaging just 2.2 percent. Despite the weak start, analysts believe 2015 will be the year when growth accelerates to a more respectable level.