This was supposed to be the year that the economy turned the corner, building on the foundation laid in 2013. It isn’t happening. The final revision to first quarter Gross Domestic Product (GDP) growth came in at a stunning -2.9%. Is it time to panic?
Nearly everyone agrees that it’s a statistical aberration, so the answer appears to be no. But we’re certainly not enjoying the economic growth that was expected this year. The economy is giving mixed signals at best, leading everyone to wonder if maybe we’re really just treading water after all.
The revision was a very technical and unusual one that needs explanation. GDP growth is first announced by the Bureau of Economic Analysis (BEA) three weeks after the quarter ends based on a number of surveys that are compiled during the quarter itself. The first revision to that data, based on more complete results, is announced five weeks later. The last revision comes four weeks after that.
This revision, from -1.0% to -2.9%, appears to be the largest in the history from the BEA. Things looked bad enough before this, but that was universally blamed on a tough winter. But there was a problem lurking in the number, and a lot of people saw it. Health care expenses appeared to have jumped over 9%, a rise not seen before. No one really believed the numbers.
Of the roughly $51B in consumer expenditures annually, $3.6B is health care, or 7% of the total. A big miss on health care expenses really skews the numbers.
The BEA has been looking at health care much more closely lately, mainly to make sure that they properly track the effects of the Affordable Care Act (ACA, aka “Obamacare”). Projecting a big rise in expenditures just as it was taking effect was a political bomb.
Those numbers were revised downward to a net contraction of health care spending of 0.9%. That contraction has yet to be well explained, but it’s at least close to no change. It could be that people have better insurance and are paying less in deductibles, or it could be that people are so broke they are delaying treatment. That final report hasn’t been written yet.
The curious part of this is that a drop in health care expenses shows up as a contraction in GDP. Sometimes, a declining GDP is actually a good thing.
So if it’s all a statistical aberration, what should we make of the changes? The short answer is that job growth plugged along at about the same +190k jobs every month in the first quarter, so no one is worried. Growth in the second quarter is now expected to come in at a robust +3.5%, giving us a (small) net gain for the year so far. Companies seem to be investing in durable goods, meaning that there is finally a push for more growth coming out of the big increase in corporate profits.
This all suggests that there is still a lot of good news to go around, even with the contraction in GDP. That doesn’t offset the sense of dread that comes with a huge drop in GDP. It also doesn’t change help the simple fact that these numbers are always a political football, whether they are up or down. In an election year you can expect the Republicans to make a lot out of this big drop, pinning it on Obama as much as they can. Talk of statistical problems only plays into their hands because it really looks like all of these numbers have more fudge in them than an 8 year old at their birthday party.
In the end, the process that the BEA goes through to revise the GDP numbers is very open and it is good that they are both diligent and willing to admit when their initial surveys aren’t quite right. It would be better if they were closer in their first survey, but they are trying. Once again we have evidence in front of us that the economy is changing so rapidly that those who are charged with tracking it are having a very difficult time.
That’s probably the best news of all in this. Revisions may be a bit painful, especially when they are this large, but we all know that a new economy is going to have to rise up to replace the one that failed us over the last decade or more. It’s going to be hard to keep up with that change. Hey, the BEA is doing their best.