Remember when the Obama administration considered a GDP contraction of 1% in the first quarter just a hiccup, mainly caused by weather? Good times, good times. That itself was a rather sharp downward revision from the advance estimate of 0.1%, but that was just a mere stumble compared to the plunge in the final revision. The Commerce Department now states that GDP fell at an annualized rate of -2.9% in the first quarter, the worst in more than five years:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 2.9 percent in the first quarter of 2014 according to the “third” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2013, real GDP increased 2.6 percent. …
Real GDP declined 2.9 percent in the first quarter, after increasing 2.6 percent in the fourth. This downturn in the percent change in real GDP primarily reflected a downturn in exports, a larger decrease in private inventory investment, a deceleration in PCE, and downturns in nonresidential fixed investment and in state and local government spending that were partly offset by an upturn in federal government spending.
This time the news is bad across the board. Exports dropped 8.9% in Q1, a huge drop from 2013, which wasn’t exactly spectacular either. Real final sales of domestic product dropped 1.3%, where in earlier estimates it had remained in positive territory. Business investment also fell:
Real nonresidential fixed investment decreased 1.2 percent in the first quarter, in contrast to an increase of 5.7 percent in the fourth. Nonresidential structures decreased 7.7 percent, compared with a decrease of 1.8 percent. Equipment decreased 2.8 percent, in contrast to an increase of 10.9 percent. Intellectual property products increased 6.3 percent, compared with an increase of 4.0 percent. Real residential fixed investment decreased 4.2 percent, compared with a decrease of 7.9 percent.
Reuters noted immediately that this is not just weather-related:
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.
Underscoring that is the May durable-goods report, which showed a contraction of 1.0% despite having a month of mild-to-good weather:
New orders for manufactured durable goods in May decreased $2.4 billion or 1.0 percent to $238.0 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, followed a 0.8 percent April increase. Excluding transportation, new orders decreased 0.1 percent. Excluding defense, new orders increased 0.6 percent. Transportation equipment, also down following three consecutive monthly increases, led the decrease, $2.3 billion or 3.0 percent to $74.4 billion.
Again, business investment signals even rougher times ahead:
Nondefense new orders for capital goods in May decreased $0.4 billion or 0.5 percent to $82.1 billion. Shipments decreased $0.5 billion or 0.7 percent to $75.9 billion. Unfilled orders increased $6.2 billion or 0.9 percent to $662.7 billion. Inventories increased $2.5 billion or 1.4 percent to $181.7 billion. Defense new orders for capital goods in May decreased $4.0 billion or 31.4 percent to $8.8 billion. Shipments decreased $0.2 billion or 2.3 percent to $9.4 billion. Unfilled orders decreased $0.6 billion or 0.4 percent to $158.9 billion. Inventories increased slightly or 0.1 percent to $23.6 billion.
This comes as Barack Obama planned yet another “pivot” to the economy, in the hopes of distracting from bad news in foreign policy and at the VA and IRS. The previously poor Q1 results already had the White House on the defensive, which they tried to brush off as weather-related and anomalous. Clearly, neither is the case. The economy has run aground on Obama’s own policies, and we’ll be lucky to hit positive growth at all this year with the bad Q1 number looming over everything. That calls into question all of Obama’s budget projections, which were based on irrationally sunny projections of economic growth this year and the next few years.
We’ve been complaining about stagnation ever since the June 2009 technical recovery. Now we may look at stagnation with some nostalgia in the months ahead. If Q2 GDP ends up in negative territory, that’s a recession no matter what the weather looks like.
Update: The advance estimate was a positive 0.1%, not -0.1%. I have corrected it above.
Update: Steve Eggleston sends an interesting analysis via e-mail:
– Tom Blumer identified the biggest contributor to this unexpectedly-bad report – a rather-radical overestimation of spending on health care (http://www.bizzyblog.com/2014/06/25/1q14-gross-domestic-product-3rd-reading-062514/). Its contribution to the change in real GDP went from +1.10 percentage points in the advance estimate to +1.01 points in the second estimate to -0.16 points in the final estimate.
– If you think the 17th-worst quarter on record (going back to 1947) for real GDP is bad, the -1.71% change in nominal (current-dollar) GDP, which is the first time since the 2nd quarter of 2009, is the 10th-worst on record. Other than the heart of the Great Recession (4th quarter of 2008 and 1st quarter of 2009), the last time nominal GDP fell by at least this much was the 4th quarter of 1960.
Of course, the BEA will get another bite at this next month when they do their annual revision of the previous 5 years of data.
There are a lot of analysts trying the Chip Diller spin today, but this is meaningful and bad news.
Update: Regarding Blumer’s observation, remember when Jay Carney credited ObamaCare for saving us from a contraction?
Uh … sure.