GDP Dropped Way More in the First Quarter of 2014 Than We Thought

U.S. growth dropped by 2.9 percent from January to March.

Traders work on the floor of the New York Stock Exchange minutes before the closing bell on October 8, 2013 in New York City. 
National Journal
Matt Berman
June 25, 2014, 5:32 a.m.

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.

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