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Comments on the Downward Revision to Q1 GDP (-2.9%)

The beautiful thing about economics is that the data tell stories and as more data are available, we can add sentences and paint a clearer picture.  This recover has been abominable. And Q1 2014 was the worst since the recession.

Five years since the Great Recession, we are in constant search for signals of life in the economy.  There are many moving parts to this story.  The latest Bureau of Economic Analysis revision of Q1 GDP demonstrates the slacking economy.  GDP contracted at an annual growth rate of -2.9%.  Note that this does not mean we are in a recession.  It typically takes successive negative quarterly growth rates to be deemed a recession.  This contraction has been attributed to:

  1. A drop in consumer healthcare spending.
  2. Weakness in export activity.

From Mish’s Global Economic Analysis:

  • Exports (which add to GDP) were down 8.9%.
  • Imports (which subtract from GDP) were up 1.8%.
  • Durable goods were up 1.2%
  • Nonresidential fixed investment decreased 1.2%
  • Consumer prices rose 1.3%.
  • Federal spending was up 0.6%
  • Personal spending was up 1.0%

From House of Debt:

A month ago, we compared the recovery from the Great Recession to the recovery after every recession since 1950. It looked pretty bad.

Real GDP growth for 2014q1 was revised downward today to -3.0% on an annualized basis. Yes, our reading of Table 1.1.3 of NIPA shows -3.0%, not -2.9%.

Here is real GDP indexed to the quarter before each recession for all 10 recessions since 1950, taking into account this morning’s revision. Notice the significant bend downward in the last quarter for the 2007-2009 recession (solid red line). It makes the recent recovery look even  worse relative to previous recoveries.


From Doug Short:

Click to View

From Sarah Portlock at WSJ’s Real Time Economics:

The U.S. economy contracted at a 2.9% annual pace in the first quarter this year, the Commerce Department said Wednesday. That is a sharply lower reading than earlier estimates and marked its sharpest pullback since the recession ended five years ago.  Economists weighed in on the third read, what it might mean for the economic recovery, and where activity stands in the second quarter.

Hindsight is 20/20, This Was Ugly/Ugly: I think we can all recognize the first quarter was ugly, and, not to be too trite about it, the degree of ugliness seems to have grown with time.  But the first quarter has been over for nearly three months now, so the more material question is: what does this number say about the second quarter?  The answer hinges largely on the technicals of how the Commerce Department plans to estimate healthcare spend when second-quarter GDP numbers are released at the end of July.  –Guy LeBas, Janney Montgomery

Rarely does one see the third iteration of a GDP number so large, and so far from consensus. … The first point is that this is simply a very ugly temperature check of activity in (the first quarter). To put this in context, the decline matched the average GDP print during the last recession, the worst since the Great Depression. The big miss relative to expectations centered on downward revisions to healthcare spending assumptions for Obamacare. What had been viewed as a 0.7% addition to GDP turned into a 0.2% drag. That accounts for most of the miss, but it doesn’t account for a disastrous quarter of growth or lack thereof. –Eric Green, TD Securities

Bottom Line: The first quarter was a complete write-off for the U.S. economy, but growth has rebounded smartly in the second quarter, in part, because companies are more willing to take out their checkbooks. –Sal Guatieri, BMO Capital Markets

In short, GDP was recession-like in Q1, although most other data clearly signal that the decline is an outlier. If anything, labor market indicators and business surveys are suggesting a net pick-up in the trend so far this year.  We expect at least partial payback with a strong 4% rate of growth in Q2. –Jim O’Sullivan, High Frequency Economics

It is amazing that the initial estimate of healthcare spending’s contribution to Q1 growth went from an initial estimate of +1.10 percentage points (representing a 9.9% quarter-to-quarter annualized growth rate in the sector) to -0.16pp (-1.4% q/q annualized). This is a crazy-sized revision, and speaks very loudly to the fact that nobody has a real handle on how the introduction of Obamacare has affected these data, nor for how long the distortions may last until things settle down. –Joshua Shapiro, MFR, Inc.

A number of factors were behind the contraction in the economy in the first quarter. The big drag was the difficult winter, which caused consumers to postpone spending, disrupted production, led businesses to hold off on investment, and caused construction delays. Consumer spending growth was weak. … But the contraction in the first quarter is old news, and things are looking much better for the rest of this year. Most importantly the labor market remains solid. –Gus Faucher, PNC Financial Services Group

More up-to-date data show that activity is rebounding in the second quarter. Indeed, May’s durables goods orders suggest that business investment is growing again. … In short, the larger contraction in GDP in the first quarter is not a sign that the US is suffering from a fundamental slowdown – it was still largely due to the extreme weather. The latest data are consistent with growth in the second quarter rebounding to at least 3.0%. –Paul Dales, Capital Economics


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