Whoa! Whassup With That Big Negative Q1 GDP Revision?

June 25th, 2014 at 10:25 am

Yes, you read those headlines right: real GDP contracted at a 2.9% rate according to revised data released this AM.  That’s contracted, as in went down.

So, are we, like, back in recession (granting that a lot of people think we never left)?

Nope.  That was a truly lousy quarter but it’s highly unlikely to be repeated any time soon.  The particularly bad winter weather played a role; both residential and commercial building were negative.  Heavy inventory buildups in earlier quarters were reversed, which usually implies a positive bounce-back in coming quarters.  Exports were revised down and imports up, so the trade deficit subtracted a large 1.5 points from the bottom line; that drag will likely diminish in coming quarters.

Health care spending, a strong contributor in earlier estimates of Q1 growth, went from contributing 1 percentage point to growth in an earlier vintage of Q1 GDP to subtracting 0.16 points in this update, suggesting earlier estimates of the pace of increased coverage were overstated.  That doesn’t mean they’re not happening; it just means they’ll be spread out over more quarters.  [Update: check that–a colleague tells me that what’s really happening here is that people didn’t use as many health services as first thought.  I’ll try to look further into this.]

BTW, on this health care revision, I don’t think this is saying anything dramatic or structural about Obamacare.  There are just a lot of moving parts here.  As more people get insurance coverage and treatment, this will show up as more spending and higher GDP.  At the same time, cost controls, which have initially been found to be quite effective, push the other way.  The punchline is: don’t expect to learn anything about Obamacare’s impact on GDP from one quarter of data.

Year-over-year—a good way to squeeze out some quarterly noise—real GDP is up 1.5%.  That’s better than the headline number, but it too is actually a weak number.  The trend over the last two years is 2.1% growth, which is about the economy’s underlying trend growth rate considering productivity and labor force growth.  I don’t believe today’s revisions really signal a decline in that trend rate and most analysts expect coming quarters to clock in at 2.5-3%.

But a) the general pattern in recent years is that acceleration predictions have been dashed, and b) getting back to trend or slightly above implies a continued slow slog in terms of closing output gaps and boosting incomes of the many who’ve been left behind so far in the recovery.  Our economy is growing–the Q1 outcome is an outlier–but it’s still under-performing and in need of supportive policy both on the monetary and fiscal sides.


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14 comments in reply to "Whoa! Whassup With That Big Negative Q1 GDP Revision?"

  1. Smith says:

    To make this real, 17 trillion/4 quarters = 4.25 trillion * -3% lost = $125 billion. If the economy grew at normal 2% instead of shrinking 3%, that’s about $200 billion. For the 120 million households that’s $1,600 missing in just 3 months. However, GDP is not National Income, so knock that down closer to $1,000. There are also coincidentally 120 million full time employed workers, so that’s also $1,000 in wages lost in just three months. Not that we’d necessarily make anything useful, or spend the money wisely.

  2. david s says:

    Everybody is so certain that Q2 will be much better, at least not recessionary. But, they were also equally certain that Q1 would be positive up until today.

    Just in general: wage growth stagnant (actually worse than stagnant), the business cycle appear to be stalling, earnings have merely been okay, business aren’t investin gin themselves like they should, the EU stinks, the housing market isn’t helping, and deficit reduction has gripped Democrat and Republican alike. Lots to contribute to a new recession.

  3. rjs says:

    havent looked at the report yet, but i’m sure you know that cost controls have no effect on the change in real (cost adjusted) GDP….the ‘real’ change is a change in units of health care delivered…

    • Jared Bernstein says:

      Certainly over the longer run, lower price on elastically demanded good leads to more spending (this is all in the expenditure part of the accounts). But lower price * same quantity equals less spending. And not sure how elastic health care spending is, anyway. Somebody out there must know.

  4. Leading Edge Boomer says:

    The Doomers are all out of their bunkers today–We’re All Going To Die! In exactly one month the preliminary Q2 report will be published. Then from the Doomers–Crickets.

    • Robert Buttons says:

      Considering 6 short months ago, all the blue sky CNBC wonks were predicting a Q1 print of +2.5 to 3.0, I would say it is NOT the gloom and doomers that “have some explaining to do”

  5. Rima S. Regas says:

    I’ll give you, optimist economists, a partial benefit of the doubt for a few more weeks, though I think this is the sign of dipping back into recession. I see a whole lot of new low-wage employment and not much in the way of good jobs, either for graduates or people who are mid-career or slightly lower.

    I see a whole lot of hemming and hawing in front of my middle class neighborhood grocery store shelves, just like at the start of the recession. I see a whole lot of consolidation at the grocery stores, too, with shelving being rearranged to accommodate a lot less product in quantity and variety. Businesses are still closing around here, too.

    If next quarter is negative or barely above the plus sign, I will hold you to a more realistic pronouncement.

    This economy has been waiting for one election after another and it’s been running on auto-pilot, without any refueling. I hope we’re not about to run out of gas.

    • Rima S. Regas says:

      On the healthcare overstatement, I have a theory… Maybe a number of people who first subscribed suddenly find themselves unable to keep up with the payments? There is always that.

    • Robert buttons says:

      I predict the next Q will be much better. Admittedly. Its a conspiracy theory, but I suspect the central planners at our Ministry of Economic Truth stuffed the bad news data into Q1 revisions so as to avoid two negative quarters in a row.

  6. purple says:

    PCE is horrid, durable orders were negative, the trade deficit is getting worse. Profits sharply declined in Q1 as well.

    There isn’t much left to wring out of the economy in terms of layoffs, but after 5 years of 0% interest rates this is terrible growth.

  7. Dave says:

    “cost controls … push the other way”

    Because GDP growth is measured on a real, inflation adjusted basis, I don’t believe that’s correct.

    • Jared Bernstein says:

      Spoke about this down thread. Sloppy language on my part. The argument is that cost controls are reducing real utilization which shows up as lower real spending.