Instant Analysis: GDP revision for Q1

Scott Anderson
Posted by Scott Anderson
Chief Economist

The morning’s third estimate of Q1 GDP came in far worse than expected at a minus 2.9%.

worker in warehouseBut before you panic that another recession is around the corner, the Q1 GDP drop was primarily due to a lot of “one- off” negative factors that all hit at the same time.  I would lump into that category: The large negative inventory swing, severe weather delays in spending and delivery of orders, large downward revision in net exports as exports plunged and imports jumped , and big drop in health services spending due to decline medical inflation and lower utilization rates in the first quarter.

The bulk of the downward revision today came from health care spending and net exports.  Healthcare price inflation continued to slow in the first quarter- up 0.5%.  At the same time, health care utilization fell 1.4% on an annualized basis.  The expansion of insurance coverage under the Affordable Care Act started in Q1, and that may have caused some unexpected volatility in health spending on the quarter.

Many of these drags on U.S. GDP growth are likely to be reversed in the second quarter.

Encouragingly, more recent data on industrial production, vehicle sales, and home sales show a solid rebound in GDP is underway.

Q4/Q4 GDP growth rates for 2014 likely to be somewhat lower than June FOMC forecasts. My current estimate of Q4/Q4 2014 GDP growth is at 1.8%.  The central tendency from the Fed in June was 2.1 to 2.3 percent for 2014.

In short, today’s terrible number on GDP is ugly reading, but does not alter the outlook for GDP growth going forward.  We still expect U.S. GDP growth of 3.6 percent in the second quarter, and a period of above trend growth through 2015. My U.S.  real GDP forecast for 2015 Q4/Q4 remains at 3.0%.

FOMC tapering of asset purchases will likely continue at the current pace, and rate hikes could still begin around the middle of 2015.


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