1Q2014 Gross Domestic Product: Second (Preliminary) Estimate

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According to the Bureau of Economic Analysis (BEA), the “preliminary” estimate of 1Q2014 growth in real U.S. gross domestic product (GDP) contracted for the first time since 1Q2011 -- at a seasonally adjusted and annualized rate of -1.0 percent. That pace of growth was down by 3.6 percentage points relative to 4Q2013 and 5.1 percentage points lower than 3Q2013. Only one of the four categories -- personal consumption expenditures (PCE) contributed to 4Q growth; the other categories -- private domestic investment (PDI), net exports (NetX), and government consumption expenditures (GCE) -- subtracted from growth.

The largest revisions to the headline number (April's "advance" estimate had been +0.1 percent) came from inventories (lowered by 1.05 percentage points) and imports (down 0.36 percent). Although exports improved somewhat from the report released at the end of April, they still subtracted 0.83 percent from the headline. Fixed investment in both equipment and construction shrank further. Government spending also contracted more quickly, with the downward revisions mainly concentrated in state and local governmental infrastructure investment. Consumer spending received a marginal upward revision. 

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For this report the BEA assumed annualized net aggregate inflation of 1.28 percent. By way of comparison, the growth rate of the Bureau of Labor Statistics’ seasonally adjusted CPI-U index was higher (1.8 percent annualized rate); meanwhile, the price index reported by the Billion Prices Project (BPP) was substantially higher at 3.91 percent. Were the BEA’s nominal estimates corrected for inflation using the BPP inflation rate, 1Q real GDP would have contracted by 3.64 percent.

Interestingly, if one excludes the stimulus to the U.S. economy generated by spending for mandatory Affordable Care Act coverage (which resulted in a record $40 billion surge in healthcare-services spending), 1Q GDP contracted by 2 percent.

Doug Short and Steven Hansen summed up the BEA report with, “the Q1 GDP Second Estimate of -1.0 percent was well below forecasts, although it's likely that mainstream economists will continue to write off the weakness as a transient result of a severe winter.” Many, perhaps, but not all. For example: “There is clearly more to the economy’s unexpected weak start to 2014 than the harsh winter weather that hit the east coast earlier this year and a reduction in inventory building,” said Mark Vitner, senior economist at Wells Fargo Securities. Vitner is among those pointing to sustained weakness in business investment, and noting that consumer spending was driven by higher health-care outlays (mentioned above) and bigger heating and electricity bills. They doubt the economy will continue to grow at a rapid pace once pent-up 2Q demand is met.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.