The U.S. economy shrank by a nearly 3 percent annualized rate in the first quarter of this year, according to the third estimate of gross domestic product out Wednesday morning. The 2.9 percent GDP drop is a much steeper decline than the 1.0 percent drop the Commerce Department announced at the end of May. And that number was a far cry from the original estimate for the first quarter, which showed a slight gain. The difference between the second and third estimates is the largest since 1976.
The January-March turndown is the worst the U.S. economy has seen since the first quarter of 2009. Economists had been expecting a lower revision for the new GDP number, something near a 2 percent drop. But this is obviously quite more dramatic.
So what happened? For months, much has been blamed on the unusually cold winter. That's part of the explanation the White House gave following the second revision in late May. Health care spending is also a major factor. Two-thirds of the new revision's drop was a result of lower-than-expected health care spending — where previous estimates had spending growing at a 1 percent rate, the new estimate shows it declining at a rate of about 0.2 percent. The government expected health care spending to be higher due to further implementation of the Affordable Care Act.
The Commerce Department also noted Wednesday that the increase in personal consumption for the first quarter was less than officials had previously thought (partially because of to health care spending), and that the decline in exports was greater than first thought.
Time to panic? Not necessarily. While we won't have an advanced estimate of second-quarter GDP (which covers April through June) until the end of July, economists largely expect that we'll see much better numbers. Economists surveyed by Bloomberg earlier this month predicted that we'll see a 3.5 percent expansion in the second quarter and an average expansion of more than3 percent for the second half of the year. Moody's chief economist, Mark Zandi, brought some optimism to the AP, saying, "We should have a much better second half this year and a much better 2015 than 2014."
And as Daniel Gross pointed out on Twitter, things could be much, much worse:
So while the new revision is definitely bleak, it may wind up just being one bad blip on the year.