The U.S. economy contracted at an annual rate of 2.9 percent in the first quarter, which is the biggest drop since the first quarter of 2009 and far worse than the government previously reported. Wall Street expected the world’s biggest economy — soon to be second-largest — to shrink by an annual rate of 1.7 percent, up 7 percent from the previously reported contraction of 1 percent.
The Commerce Department said Wednesday that gross domestic product clocked in at its worst performance in five years, and the worst performance ever during a period that was supposedly not an economic recession. Surveys have consistently found that Americans believe the economy is in a recession, and until now, government data just didn’t reflect those views.
The largely negative economic news and data from the housing market and labor market have been blamed repeatedly on an unusually cold winter in media, even by outlets like FOX Business. However, as we’ve previously reported, the degree to which negative, long-term trends and data influenced the revisions demonstrate deeper and more fundamental weaknesses than can be explained by the weather. While many economists estimate colder-than-expected weather could have slashed as much as 1.5 percentage points from GDP growth in the first quarter, the government offered no details on the impact of weather.
Growth has now been revised down by a total of 3.0 percentage points since the government’s first estimate was released back in April, which had the economy expanding at an abysmal 0.1 percent rate. It isn’t at all unheard of for the government to revise estimates, or even that they have ill-intent to make those revisions, but the disparity between the second and third estimates was the largest ever on record. Dating back to 1976, the government has never missed the mark by more, the Commerce Department said.
The latest revisions show a weaker pace for consumer spending on health care than the government assumed, which not only reflects the increasing costs under ObamaCare pushing individuals to opt instead for the fine, but also resulted in a downward revision to the consumer spending estimate. Trade deficits, again, were responsible for a bigger slice off of GDP than previously thought.
Exports declined by 8.9 percent, not the previously estimated 6.0 percent pace, which helped to build a trade deficit that sliced off an estimated 1.53 percentage points from GDP growth.
The government’s measurement of domestic demand that excludes exports and inventories expanded by just 0.3 percent rate, rather than a 1.6 percent rate. Inventories sliced off 1.70 percentage points from first-quarter growth estimates, as well.
So, while businesses accumulated $45.9 billion worth of inventories, which is less than the $49.0 billion estimated last month, inventories still slashed 1.70 percentage points from first-quarter growth.
The latest economic data on the labor market, manufacturing and services sectors are giving many hope for an acceleration in growth early in the second quarter. Macroeconomic Advisers recently forecast the U.S. economy will grow at a 3.6 percent annual rate in the April to June period. However, many economists are now not viewing that figure as viable.
For instance, consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased by just 1.0 percent. Yet, it was previously reported to have increased by a 3.1 percent pace. Further, as previously reported, weak housing market data may point to danger on the horizon, with the government again abandoning sound lending practices with an aim to rebound a fragile and volatile recovery that never was.
