U.S. Economy Didn't Shrink By 1 Percent After All; It Shrank by 3 Percent.


GDP shrinkage
U.S. Department of Commerce

We heard last month that the United States economy hit the cold, cold water of weak investment and, yes, a frigid winter and experienced a little…shrinkage in the first quarter of this year. But, as it turns out, the United States Department of Commerce was mistaken in its initial report of a 1 percent contraction in Real GDP. It was actually 2.9 percent, according to Commerce's Bureau of Economic Analysis (BCE).

According to BCE's announcement:

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.

The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP was estimated to have decreased 1.0 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was smaller than previously estimated, and the decline in exports was larger than previously estimated (for more information, see "Revisions" on page 3).

The decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, state and local government spending, nonresidential fixed investment, and residential fixed investment that were partly offset by a positive contribution from PCE. Imports, which are a subtraction in the calculation of GDP, increased.

The Wall Street Journal has an interesting roundup of economists' reactions to the downward revision in the BCE's numbers, with words like "ugly" and nasty" featuring prominently.

"The big miss relative to expectations centered on downward revisions to healthcare spending assumptions for Obamacare. What had been viewed as a 0.7% addition to GDP turned into a 0.2% drag," notes Eric Green of TD Securities.

Joshua Shapiro of MFR agrees, saying "This is a crazy-sized revision, and speaks very loudly to the fact that nobody has a real handle on how the introduction of Obamacare has affected these data."

But, even though healthcare spending seems to have played a major role in the downturn, it's not the only story. The Labor Force Participation Rate is still in the tank, at 62.8 percent, the lowest level in decades.