Jared Bernstein: Whoa! Whassup With That Big Negative Q1 GDP Revision?

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.

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.


 

Rima NYT Comment SmallI’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.

** 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.

Reposted with permission from jaredbernsteinblog.com

  • commchf

    Sequestration is still an enormous drag, the public has been bamboozled by the oligarchs into believing that deficit spending when the economy is hurting is a bad thing. There are too many smart and talented people either on the sideline or working at things far below their ability.

    When a nation (with its own currency) has slack in demand coupled with smart and talented people sitting around waiting for something to do their is no threat of inflation to the currency. We need to SPEND.

    And that won’t happen soon.

    • RimaRegas

      I agree. What’s more, people are disengaging due to loss of faith in our institutions instead of hyper-focusing on politics at primary time. That doesn’t bode well for November.