Economy in First Quarter Was Worse Than Everybody Thought
The beginning of the year was not just bad for the United States economy: It was, on paper at least, the worst quarter since the last recession ended five years ago.
The Commerce Department revised its estimates of first-quarter gross domestic product Wednesday to show that the economy contracted at a 2.9 percent annual rate. A combination of shrinking business inventories, terrible winter weather and a surprise contraction in health care spending drove the first-quarter decline, which is the worst since the first quarter of 2009, when the economy shrank at a 5.4 percent rate.
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. are 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.
But the fact that the economy as a whole could show such a sharply negative result thanks to a few combined idiosyncratic factors is also a reflection of the underlying weakness in the economy.
When growth is strong, even some bad weather and an unexpected inventory swing don't cause a contraction in the economy, or at least not a contraction on the scale reported for the first quarter of 2014. But because the pattern of growth has been roughly in the 2 percent range or a bit below that for years now, the economy is more vulnerable to shocks that leave G.D.P. growth in negative territory.
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