US economy contracts by revised 5.5%

The US economy continued to contract in the first quarter of this year, but at a slower pace than previously thought, official figures showed on Thursday.

Separately, the labour department said that new claims for unemployment benefits grew more than expected last week, offering a stark reminder that even as the economy turns around the stricken labour market could be slow to follow.

Revised commerce department figures revealed that US gross domestic product declined by an annualised rate of 5.5 per cent in the first three months of the year. That was better than economists expected and a smaller contraction than the original estimate of a 6.1 per cent contraction and last month’s estimate of a 5.7 per cent decline.

Output is slowly beginning to rekindle in the US economy, which has been mired in its worst recession in the last 50 years. The first quarter result, while grim, was an improvement from the end of 2008 when GDP declined by 6.3 per cent, the steepest fall since 1982.

Economists expect to see more significant improvement in the second quarter of this year. On Wednesday the Federal Reserve said in its Federal Open Market Committee statement that economy activity was likely “remain weak for a time” but that sustainable economic growth would then resume gradually while inflation remains “subdued”. Meanwhile the Organisation for Economic Co-operation and Development improved its outlook for the US and predicted the economy would grow by 0.9 per cent next year.

Housing and manufacturing have shown signs of life lately. Home prices and sales have begun to stabilise in some areas and businesses have begun to ramp up their capital investment with more orders for durable goods.

However, analysts fear that rising joblessness could slow the recovery. The labour department said on Thursday that initial jobless claims rose by 15,000 to 627,000 last week. That was more than expected and boosted the four-week average to 617,250.

The number of Americans continuing to claim unemployment benefits rose in the second week of the month to 6.74m, up from 6.71m the prior week.

“With initial claims still very high at above 600,000, it is unlikely that new hiring has picked up in any meaningful fashion,” said Joshua Shapiro, chief US economist at MFR. “More probable is that long-term unemployed are starting to fall off the rolls as the duration of their unemployment benefits reaches the statutory limit.”

The US unemployment rate rose to 9.4 per cent last month and is expected to climb to 9.6 per cent in June.