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

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.

Comments

[Yuno Hoo]

Does this count as a comment?

[WhatAboutBob]

The U.S. has been in a depression since 2008 but the Federal Reserve is in denial and Obama's policies are just making the problems worse.

[Knarf Yenrab!]

I'm convinced this is the right take. What we're experiencing is what Japan experienced a decade before us--a latter-day depression in a world made so wealthy by 20th-century innovation that we can absorb the pain far better than our grandparents did under Hoover and FDR.

And when the latest housing bubble bursts, we're going to see another crisis like 2008. The only question is whether they'll do the right thing this time or just delay the pain of the correction and leave the nation stagnating for another six years.

[Episiarch]

Oh, it'll be the latter. Count on it.

[John]

And anyone who had any brains said in 2008 that if we did TARP and printed money instead of letting the banks fail and letting the market shake itself out we would end up with a lost decade like Japan did in the 1990s. Sure enough that is exactly what has happened.

If I hear one more self appointee "wonk" (oh Mrs Suderman we are looking at you) talk about how the consensus among economists is that we need more easy money and big spending, I am going to vomit.

[Rob]

I don't think the problem is easy or the lack thereof. The problem is the massive malinvestment being fostered by a zero interest rate policy (possibly negative rates coming to the Eruozone). Instead of companies using cheap money for capital expenditures the money is being pushed into the stock market. How much has Apple spent on share buybacks by issuing bonds? And they aren't the only company.

[sarcasmic]

I blame Bush.

[WTF]

It's the only possible explanation. Just ask shreek.

[Ken Shultz]

It seems like the whole world is out to make whatever happens seem like good news for Obama somehow. Decreased healthcare spending may indeed have contributed, but that doesn't ring true with some of the other data I've seen.

I've seen that more than half of the people who bought on the exchanges were previously uninsured. How does more people buying insurance than had it before translate into less healthcare spending?

I've seen it reported that the people who bought on the exchanges were disproportionately sicker than the general population. How does sicker people who suddenly have insurance translate into less healthcare spending?

I'll make a prediction. If Q2 comes in below expectations, I expect to see a lot of stories, first, blaming it all on the summer heat, and if the numbers are subsequently revised downward, we'll see more stories suggesting that it proves that Obama was right about something or other.

[Jordan]

I'll make a prediction. If Q2 comes in below expectations, I expect to see a lot of stories, first, blaming it all on the summer heat, and if the numbers are subsequently revised downward, we'll see more stories suggesting that it proves that Obama was right about something or other.

I'm sure shriek is actively preparing his list of excuses.

[Bill Dalasio]

"...and if the numbers are subsequently revised downward, we'll see more stories suggesting that it proves that Obama was right about something or other."

Nah. It will be touted as "proof" that we need another stimulus. Oh, and it only happened because those icky old guys in Congress were too tightfisted on government spending.

[AlmightyJB]

You have Krugmans number all right.

[Rob]

Considering the amount on healthcare spending was revised from + $50 billion to - $6 billion (numbers might be off a bit) I expect to see a big jump in the next quarter. They just used accounting tricks to push the money into the next quarter. Maybe they are expecting another decline next quarter and are trying to avoid back-to-back negative quarters (technically a recession). Just take the hit now. That is probably a better idea than trying to spin away a recession. The press will ignore one bad quarter and eat up the "it was the weather" excuse, but with a recession they will need to have at least some minimal coverage.

[Ken Shultz]

"People enrolled in new plans under the health law are showing higher rates of serious health conditions than other insurance customers, according to an early analysis of medical claims, putting pressure on insurers around the country as they prepare to propose rates for next year.

Among those health-law marketplace enrollees who have seen a doctor or other health-care provider in the first quarter of this year, around 27% have significant health issues such as diabetes, psychiatric conditions, asthma, heart problems or cancer, the data show. That is sharply higher than the rate of 16% for last year's individual-consumer market over the same time frame.

It is also more than double the rate among people who held on to their existing individual policies; among those enrollees, the rate was 12%. Those consumers, who kept so-called grandfathered individual plans, are showing by far the lowest rates of use for health-care services such as emergency-room visits, hospital stays and prescriptions."

http://online.wsj.com/articles.....1403656445

So how does all that translate into less healthcare spending?

And yet that's the explanation I keep seeing!

[Knarf Yenrab!]

Well, that's, like... Well...

Eight million!

[Knarf Yenrab!]

And I for one am pleased to know that the ACA magically conjured a few hundred thousand extra medical care providers to increase the total number of provider hours available to American consumers rather than discouraging physicians from entering or remaining in the field. Or perhaps it just encouraged those lazy part-time doctors we read so much about to work full-time hours like the rest of us.

Is there nothing mandates and mountains of red tape can't accomplish?

[Ken Shultz]

Yeah, well, you know, that ugly Q1 GDP number?

That was because ObamaCare is saving us all so much goddamn money--that we're not spending as much as we used to!

That's the take I keep reading, and it looks like pure horseshit to me.

"But, even though healthcare spending seems to have played a major role in the downturn, it's not the only story."

How do we know consumers and businesses are spending less on healthcare than we were before? Where are we getting that information from?

Wouldn't spending more money on healthcare than ever before also explain the behavior we're seeing through the lens of GDP?

For instance, deductibles now are much higher than they were before ObamaCare. Doesn't money spent on higher deductibles come out of consumer discretionary spending?

[Knarf Yenrab!]

That was because ObamaCare is saving us all so much goddamn money--that we're not spending as much as we used to!

That's the sort of batshit crazy that reveals just how little basic economic understanding people have in the media, the public, or the field of economics itself.

It's as though they have no intuition for how economic actors work at all or where wealth comes from.

[Ken Shultz]

Meanwhile, deductibles on the exchanges averaged about 40% higher than they were before ObamaCare.

"What's worse, that represents an increase of 40 percent from the average deductible for an individually purchased plan before the federal health care overhaul, according to The Wall Street Journal.'

http://www.cbsnews.com/news/ob.....ker-shock/

More people buying health insurance + sicker people on the health insurance rolls + 40% higher deductibles = less healthcare spending, so ObamaCare rocks!

[PapayaSF]

Amusingly, one of the things that supposedly defined the "junk policies" the Obamacare outlawed was... high deductibles.

[Sevo]

Knarf Yenrab!|6.26.14 @ 10:30AM|#
"Well, that's, like... Well...
Eight million!"

I thought it was 8%, but maybe I'm confusing it with something else.

[Knarf Yenrab!]

Eight million is the number tossed around by Krugman and Klein (which conveniently doesn't mention whether the newly insured actually paid for their insurance, the number of people who lost their insurance, or the number who have insurance but no physicians willing to serve them, or the price per new coveree, among other factors), though I'd happily mock whatever other obvious fictions the progressives trot out this week.

[Rasilio]

You take a bunch of people who used to pay for their medical care out of pocket, force them to pay for insurance they cannot afford, and now they cannot afford the out of pocket deductibles/copays which means they see the doctor less.

So if X was spending $200 a month on medical expenses and now he has to spend $100 a month on insurance which does not actually give him any coverage till he meets a $6000 deductible he just won't be able to go see a doctor at all now.

What you have done is made him spend $100 for the privilege of not seeing a doctor that he can no longer afford, but hey if he gets cancer he's covered.

[Colonel Slanders]

One thing is certain: Wherever the numbers come in they will be revised a couple of months later. If it grows a little, it will be revised to having actually shrunk a bit. If it shrinks a little, it will be revised to having actually shrunk considerably. Whatever the numbers say you can guarantee the Ministry of Information will make Kommandant Obama seem to be the bringer of light and all that is good and holy.

[Ska]

Something about number of shoes produced being no closer to the truth....

[Sevo]

'Well, comrade, my quota was 8 tons of footwear. Nowhere does it say more than one shoe!'

[John]

Another 9-0 bitch slap for the Obama Administration. The Court ruled his NLRB recess appointments were invalid.

[WTF]

And nothing will happen. It's not like the Obama administration gives a crap about the law or anything else.

[John]

No. They will kick the board members off and the decisions will have to be reheard. It is a massive fuck up that will cause all kinds of problems. But the media will just ignore it.

[Ken Shultz]

"But the media will just ignore it."

Well, there's so much else to talk about!

I heard there's a missing plane somewhere.

And they kidnapped some girls in Nigeria.

There's a rape epidemic on our college campuses.

And there's all the Republican racists who hate the World Cup!

[John]

And some Republican City Council candidate in rural Alabama said something mean about gays.

[Invisible Finger]

A ConLaw professor loses 9-0 twice in two days.

I wonder how many shitty law students he wound up giving A's to.

[steedamike]

Was he a professor? At the very least I don't think he graded any papers, or had tenure - he only lectured.

[some guy]

Is it just me or is this administration getting a lot more 9-0 slap-downs than average?

There should be some consequences to the legislature or executive if they get slapped down 9-0. Because if all 9 justices agree that something is illegal then both Congress and the President should have also known it was illegal.

[John]

I don't think so. He just does things that have no rational defense other than go fuck yourself.

[Drake]

So we printed a shit-ton of cash, raised taxes, made healthcare too expensive, and regulated the fuck out of everything in sight. Mission accomplished.

I'm shocked the economy didn't tank sooner. This is what the Great Depression was - a series of sharp recessions separated by really weak recoveries. Driven by massive government spending, taxing, borrowing, and regulation.

[John]

And massive uncertainty due to constant changes in government policy. Don't forget that. FDR could never stick with a plan and was constantly and unpredictably changing policy. By preventing the market from being able to adjust to a given policy, that as much as anything prolonged the misery. Today Obama's lawlessness and politically driven waivers and such is doing the same thing.

[Drake]

Yep - still getting mixed messages on the employer mandate and finding out what was in the Obamacare bill.

[MJGreen]

Oh sure, it's all because of the confidence fairy!

- Paul Krugman, expert businessman

[Knarf Yenrab!]

Talk like that will lead the NYT on a propaganda campaign encouraging another world war as a means of increasing aggregate demand.

[Episiarch]

Krugman saw Falling Skies, thought it was real, and jizzed his pants that we were having an alien invasion and that would unite the planet and stimulate the economy.

[John]

I had to read a bunch of excerpts from his books for an Army class I was taking. The one thing that came out of reading him, other than the obvious facts that he is an idiot, is that the one thing that drives everything he writes is his total fear of uncontrolled change. Once you realize that he fears uncontrolled change more than anything, everything he writes makes sense. Pretty much everything he writes can be boiled down to "all of these things are changing and no one is in control!! We have to do something!!"

[Idle Hands]

I think your talking about Thomas Friedman not Krugman.
This is relevant though.

[John]

Yes I am talking about Friedman. I need to start keeping better track of Times employed idiots. I get them confused sometimes.

[MJGreen]

Yeah, that's Friedman. Paul Krugman's output before 2000 was quite good. And considering his textbook explicitly contradicts the shit he spews on the NYTimes editorial page, I wouldn't be surprised if his textbook is solid too.

[John]

Krugman wrote a very good book back in the 1980s called Peddling Prosperity. Once he started writing for the Times he went insane and is now just a professional troll.

[Bill Dalasio]

No, John, he didn't go insane. He just sold out. He knows better than the shit he's spewing, he just spews it anyway because that's what his audience at the Times wants to hear. I mean wasn't the distinction between real economics and policy entrepreneurs kind of what Peddling Prosperity covered? Why assume he didn't act on his observations?

[John]

Bill,

I think Krugman believes he is telling a necessary and noble lie. He has to know the things he writes are complete nonsense. I think he writes them because he thinks that his lies are necessary for advancing what he sees as the noble cause of progressivism.

[Bill Dalasio]

But, then, as MJGreen points out, why does he not lie when he's writing textbooks (they contradict some of the crap he writes for the Times)?
I mean spewing bullshit has been very, very good to Paul Krugman. It's paid him very well. It's gotten him noteriety that he can cash in on on the speaking circuit. It's won him a national fan base. Hell, it probably played a role in his getting a Nobel prize. That sure beats being a well-regarded academic at Princeton.

[Boba]

It was likely written by a grad student.

[Knarf Yenrab!]

That's exactly it; Krugman the political actor became big when Kerry ran a decade ago, and since then he's shifted toward the Platonic lie strategy to rally support to the Democratic Party regardless of the economic merits of their initiatives. That's also why Murphy et al find it so easy to catch him in open equivocations if not blatant contradictions: Krugman understands that he's too prominent a political figure now not to spout the party line, which leads him to bluff his way through columns with jargon and bravado.

I've been reading Krugman's Econ 101 textbook and it's shockingly not terrible, not particularly worse than Mankiw's. He legitimately understands market economics--he's not a socialist in the old, purist sense of the word--and there's apparently a reason why he and Stiglitz are respected among positivists. But when he contradicts himself, the number of people willing and able to call him onto the carpet is vanishingly small, as apparently there's only a handful of mainstream journalists with the education and willingness to criticize his anti-market columns by contrasting him with textbook (his textbook, it bears repeating) market economics.

[Bill Dalasio]

Exactly. I've always like to joke when someone mentions Krugman by asking if they're referencing the economist or the Times writer. You'd be surprised how many people wind up getting what I'm talking about.

[Invisible Finger]

I'm shocked the economy didn't tank sooner.

It did. GDP is a bullshit number.

Always had been, but now it's NEW & IMPROVED with extra B.S. power!!!

[some guy]

What is a better number? I know Labor participation is better than the unemployment rate. So what is the better alternative to GDP? Is there a measure for "wealth increase rate"?

[Lady Bertrum]

It is a B.S. number but it's the number used by the establishment and the media.

It's a bit of a 'hoisted on they're own petard' thing. If they're going to go bragging about the wonders of a +2% economy then the need to be responsible for a -2.9% as well. Suck it bitches!

[Ken Shultz]

I'm not sure it's a BS number--especially when you're talking about comparing it to itself.

So long as whatever you're measuring, you're measuring consistently, it's going to tell you something about what's happening with prices and production over time.

[Lady Bertrum]

It's not a consistent measure because constantly play with inputs - changing up variables, much like the CPI.

[Ken Shultz]

Doesn't that make it more accurate?

If you're not including telecom services in your CPI number but you are including rentals from Blockbuster, you're getting more inaccurate over time. You have to swap stuff out.

And when they make a switch, you can look back at whatever they're switching into historically. I think all of that's necessary.

Point is that measuring GDP is useful for what it's useful for (comparing it to itself). And the changes you're talking about are a necessary part of it. Whatever changes they're making to their GDP calculation are changes that people can look at historically.

I guess I see it the other way around: I'm not going to pretend the GDP number is bad just because it suggests that the economy is strong enough to withstand whatever stupid thing Obama implemented last quarter. Whatever numbers come up--so long as they reflect reality--cannot mask Obama's stupidity for what it is.

What Obama says every day about what makes the economy grow is still dumber than creationism--even if the economy manages to grow (by way of a GDP number) in spite of him.

[Invisible Finger]

especially when you're talking about comparing it to itself.

They keep adding things to it to inflate the number. R&D was recently added to it.

[Ken Shultz]

Nobody knew what R&D spending was before?

[Invisible Finger]

So what is the better alternative to GDP?

Percent of population on food stamps.

[Rasilio]

There is no good number becuase politicians won't let there be one.

The problem is that GDP or any other aggregate number becomes a political football. Rather than dispassionately reporting a status the minute you create the measure you create an incentive for politicians and bureaucrats to "manage to the number" which then interferes with the economy. Basically it is a quantum system, the act of measuring the state of the economy interferes with the functioning of that economy by changing incentives.

[Cytotoxic]

Gross Output is a better number and the USG is actually starting to report it. I'll post a link later in the PM links.

[R C Dean]

What is a better number?

GDP ex government borrowing would be a start.

[Lady Bertrum]

Can't wait for the Q2 number due out in late July. If it's below zero (quite likely) then campaigning for midterms will be a blood sport. How'd you like to be a Democrat running for re-election while we're in a recession? Fun stuff.

And, Watching Yellen and the Fed gyrate will be hilarious. Will they 1) discontinue the tapper and continue on with loose money even though it's dangerous (inflation generating and dollar damaging) or 2) Continue to tighten during a recession?

There is no winning.

[John]

In all seriousness, if you are a Dem running for reelection in November, what the hell do you say? Yeah, I know the usual culture war "GAYZ and the RACISM and WAR on WOMENZ" stuff. But other than that, what? I can't think of anything. All they have left is the culture war.

[Xeones]

It will be enough for many.

[Cytotoxic]

Not enough if people get scared.

[MJGreen]

Culture war and "we care about your healthcare." That's all they have. Maybe a few of them will play on envy for the rich, but the smarter politicos know that won't do anything.

[Lady Bertrum]

It'll be a two prong but related approach:

1) Attack the Wreckers and Kulaks. "The Evil Corporations are off-shoring your jobs!! They're not investing in America!! Pay your fair share!!!!!" (While the dems still accept campaign donations from Goldman Sachs and JP Morgan)

2) Free Shit. "Increase minimum wage, protect your social safety nets!!!!!!"

They'll throw in some WAR on WOMEN, RACISM, THE GAYS, too.

[Paul.]

I dunno, let's see... if you were a dem running during a bad economy, record high gas prices, what would you have said in 2011 that got you re-elected in '12?

[Drake]

Just heard yesterday - many of the people who signed up for Obamacare, then never paid there premiums, received lots of services before they were cancelled. Now there are $ millions in physician services, hospital costs, lab fees, etc... bouncing around between the providers and insurers.

Somebody is going to have to take some massive write-offs.

[radar]

Hooray for risk corridors!

We're so fucked.

[jarucino]

Only a hyper-partisan fool would defend this mess, which is why nearly all Dems running this year are avoiding talking about it.

Health insurance should be like car insurance and should kick in when there are major problems. Can you imagine what an oil change would cost if it was covered under your auto insurance? You don't bill your car insurance for oil changes or little scratches in your car's paint job.

Also - unlike the gov website, auto insurance sites actually work! I pay $25/month for car insurance at Insurance Panda. With healthcare dot gov, it takes me hours to get an unaffordable BS rate. Who can afford $600/month insurance?

All in the plan. Problems at the end so more can say they tried but couldn't so now anyone can get an extension, further helping enrollment numbers. Add this to the 38 changes made to the law since passage, the joke continues. But, it's the law of the land and cannot be changed!

[Gilbert Martin]

"Can you imagine what an oil change would cost if it was covered under your auto insurance? You don't bill your car insurance for oil changes or little scratches in your car's paint job."

Just wait a while and they'll get around to screwing that up too.

"Free" oil changes will be declared to be a human right.

[Aresen]

I am unimpressed by the -2.9% number. One quarter does not make a 'recession' (I think even the 'two quarters' measure is dumb.)

It is the mirror image of PB and the Team Blue cheerleaders claiming that the recession was over when the economy 'grew' for two consecutive quarters. It wasn't isn't over until the economy grows past the levels pre-recession.

[Drake]

Half a year of negative growth isn't a recession?

[Cytotoxic]

That -2.9 number is annualized, so it's not as big as it seems. But there is every reason to believe the US economy is in recession right now.

[R C Dean]

To turn that -2.9% into a positive in the second quarter will require growth of (counts on figures, carries the 1) 3%. I don't see that big a swing after a negative quarter, well, in nearly forever.

http://www.economagic.com/em-c.....gdp-qtrchg

[Paul.]

Maybe if the re-re-re-re-re-re-adjusted how they calculate CPI etc.

[PapayaSF]

Wow, you are correct. That means that we will likely be officially in a recession when the next numbers come out. And ISIS/al Qaeda means higher oil prices and a higher likelihood of terror attacks.

It is going to be an interesting election in November....

If only we could somehow harness the spinning of the Democrats and the media, think of the amount of electricity we could generate.

[plusafdotcom]

Yeah, a friend of mine sent me that with an accompanying bar chart of GDP growth over the past few decades.

A quick look at the graph showed that GDP went near or below zero ALMOST EXACTLY EVERY TWO YEARS...

So, I wondered if election years have something to do with tanking GDP...