Article Summary
The US economy has grown at the rate of 3.4 per cent in the second half of 2013 but this pace of growth has died down in the first quarter of 2014. The GDP of the US contracted by 1 per cent in the first quarter of 2014 . In 2011 the economy had contracted by 1.3 per cent but has not seen any contraction since then until 2014. The immediate cause of this contraction is the severe winter weather conditions this year that has subdued economic activities in many regions of the country. It is believed that the unmet demand of this period will be compensated in the next quarter and the economy will move to its long run growth path.
There are other indications of this fall in growth. Corporate profits have fallen from $1.905 trillion in the fourth quarter of 2013 to $1.880 in the first quarter of 2014 . Though the unemployment rate has fallen since the recession the job growth has not been a very optimistic one. This has resulted in lower consumer spending. The housing sector which has shown a steady pace of growth in 2012-13 has slowed down due to higher mortgage rates and rising prices. Though consumer spending has grown at a rate of 3 per cent, business investment came down by 1.6 per cent. Investment in the housing sector has also declined. While exports fell by 6 per cent in the first quarter of 2014 imports saw a rise by 0.7 per cent. Both the movements had a drag effect on the GDP. Fall in the government expenditure is another factor responsible for the contraction of GDP in the first quarter of 2014. The construction sector has suffered considerable setback due to the inclement weather conditions in the winter months. This has also an effect on the GDP.
The fall in aggregate demand through fall in government expenditure, consumer expenditure and investment has resulted in the fall in the GDP. This is depicted in the figure below. The aggregate demand curve has shifted leftward from AD0 to AD1. As a result the price level has fallen leading to a decrease in production leading to a fall in the output from Y0 to Y1 .
P
P0
P1
AD0
AD1
Y1 Y0 Y
Works Cited
Leubsdorf, Ben and Sarah Portlock. "GDP COntracted at 1% Pace in FIrst Quarter." The Wall Street Journal 29 May 2014. English.
Mankiw, G.N. Macroeconomics. Macmillan, 2013.
