Last month, the Commerce Department revised its initial assessment for economic growth in the First Quarter sharply downward with a report showing that the economy had shrunk by 1% during the first three months of the year. As with the anemic report that had been initially put out, much of the downturn was attributed to the unusually brutal winter that had impacted parts of the country ranging from the Northeast to the South and Mid-West. With the release of the final revision today, it is clear that the economy shrank by even more than first thought between January and March, but it isn’t clear what that means for the future:
WASHINGTON—The U.S. economy contracted at a worse pace than previously estimated in the first quarter, marking its sharpest pullback since the recession ended five years ago.
Gross domestic product, the broadest measure of goods and services produced across the economy, contracted at a seasonally adjusted annual rate of 2.9% in the first three months of the year, according to the Commerce Department’s third reading released Wednesday. That was the fastest rate of decline since the first quarter of 2009, when output fell 5.9%.
Commerce had previously estimated output fell by 1% in the first quarter as manufacturers drew down inventories rather than produce new goods and as unusually harsh weather kept consumers at home and shut down work sites. Exports also declined after a surge late last year.
In its third GDP reading, based on newly available data, Commerce said first-quarter consumer spending and exports were even weaker than previously estimated.
Economists surveyed by The Wall Street Journal had predicted Wednesday’s report would revise GDP growth down to a 2% decline.
The economy’s first-quarter stumble has once again dashed hopes the recovery was in the process of switching into a higher gear. Early second-quarter data indicates the economy has improved this spring as warmer weather helped release some pent-up demand. Macroeconomic Advisers recently forecast the economy will grow at a 3.6% annual rate in the April to June period.
But the depth of the first-quarter decline in output means growth over the first six months of the year likely fell below the economy’s average rate of just over 2% since the economy emerged from recession in June, 2009. That is below the U.S. economy’s longer term growth rate of just over 3%.
Five years into the recovery, high unemployment and stagnant incomes continue to restrain consumer spending, which accounts for more than two thirds of U.S. economic output. Consumer spending grew by a 1% pace in the first quarter, revised down from the previous estimate of 3.1%. Commerce said the downward revision was primarily the result of weaker health-care spending, though it also revised lower its estimate of spending on goods.
Reuters notes that the downturn isn’t just related to the weather:
The Commerce Department said on Wednesday gross domestic product fell at a 2.9 percent annual rate, the economy’s worst performance in five years, instead of the 1.0 percent pace it had reported last month.
While the economy’s woes have been largely blamed on an unusually cold winter, the magnitude of the revisions suggest other factors at play beyond the weather. Growth has now been revised down by a total of 3.0 percentage points since the government’s first estimate was published in April, which had the economy expanding at a 0.1 percent rate.
The difference between the second and third estimates was the largest on records going back to 1976, the Commerce Department said.
Neil Irwin provides some analysis:
What makes the sharply negative number all the more stunning is that it didn’t feel like an economic contraction at all in the first quarter. Employers kept adding jobs. Many measures of business activity and consumer confidence were stable. And forecasters are expecting a healthy pop of growth in the second quarter, which ends next week.
But the economy was hit by an unlikely combination of negative forces that conspired to turn what seemed set to be another quarter of so-so growth into a considerably more gloomy experience.
Economists had expected the revised number to show contraction, though they expected a less bad number than the one that materialized. One key thing they missed: Consumer spending, the mainstay of economic activity, was far weaker than either government numbers or private analysts had thought — particularly spending on health care.
Previous G.D.P. numbers, released in late May, showed that health care spending contributed 1 percentage point to economic growth. The new report now finds that health care spending actually subtracted 0.16 of a percentage point from the growth rate. The health care spending data in G.D.P. is a measure of how much President Obama’s health reform law is reshaping health care spending patterns, and it is now showing opposite results from those reported two months ago, when the first-quarter data was initially released.
But other causes of the first quarter contraction were already well known. Businesses pulled back on their inventories, which subtracted 1.7 percentage points from growth (an earlier estimate had been 1.6 percent).
And the rough winter weather threw a wrench in many categories of business activity, slowing home building activity (residential investment subtracted 0.13 percentage points) and commercial building work (which subtracted 0.22 percentage points). Trade was a further drag, as exports fell sharply and imports rose a bit.
The conventional wisdom since the initial report of First Quarter economic activity has been that the numbers for this time period would be somewhat anomalous thanks largely to the impact that severe cold and heavy snow had on economic activity over a wide swath of the economy. Indeed, most forecasts for the Second Quarter and headed into the rest of the year call for positive growth, albeit something more in the range of 2.5% to 3% at most, which is good but hardly great. As Irwin notes, though, the numbers during the First Quarter were down for reasons that can’t be attributed to just the weather itself, suggesting that there could be underlying issues that will impact the economy going forward. Additionally, as Irwin goes on to note at the link, the fact that the economy can be sent into such a sharp downturn, even if it only turns out to be brief one, is a sign that the economy as a whole is not nearly as healthy as we would like to think, and that additional unexpected events could send the economy south yet again. In the coming months, that could be anything from a hurricane that hits along the Gulf Coast or the East Coast, or increased gas prices due to rising tensions in the Middle East. One sign that the Second Quarter may be troublesome can be seen in the May Durable Goods report released today, which showed orders shrinking by an unexpected 1.0%. While other economic data has been more positive, a number like this does not bode well for a robust bounce back from a weak First Quarter.
