U.S. economy shrank at 1% annual pace in 1Q

The U.S. economy shrank in the first quarter for the first time in three years as businesses increased inventories more slowly than initially believed, and bad weather hampered activity.

In the first three months of 2014, the nation's gross domestic product fell at a 1% annual rate, vs. the 0.1% increase first estimated, the Commerce Department said Thursday. Economists expected the report to show that the nation's output declined about a half a percentage point compared with the fourth quarter.

The last time the economy contracted was in the first quarter of 2011.

Last quarter's drop was largely due to businesses boosting inventories more slowly after aggressively adding to them late last year.

Adverse winter weather also contributed to the contracting economy. Non-residential construction plunged 7.5%, vs. the 0.2% gain initially estimated.

And state and local government spending fell 1.8%, vs. an initial estimate of 1.3%.

On the positive side, consumer spending rose 3.1%, slightly more than the 3% first believed. And housing construction declined 5%, less than the initial estimate of 5.7%.

Exports also fell less sharply — at a 6% annual rate, vs. the 7.6% first estimated.

Economists wrote off the weak quarter as a temporary bump in the road to a faster recovery.

"For those worried about a recession, it's worth remembering that employment increased by nearly 300,000 in April," economist Paul Ashworth of Capital Economics said in a research note. "Those numbers point to a recovery gathering some real momentum at last."

Economists expect growth to accelerate this year now that consumers have shed much of the debt they amassed in the mid-2000's, and federal government spending cuts have eased. The housing recovery, meanwhile, is expected to regain momentum after faltering in the first quarter.

Jim O'Sullivan, chief U.S. economist of High Frequency Economics, predicts economic growth will run at a 4% annual pace in the current quarter as businesses and consumers make up for reduced spending early this year. Many economists expect growth to exceed 3% the rest of this year and in 2015.

Since the recovery began in June 2009, the economy has grown at a lackluster 2% pace but increased to more than 3% the second half of last year, fueling hope that stronger gains were at hand.

Several economic reports for April have been encouraging, with business investment, home sales and employment advancing from previous months.