Summary:
- U.S. GDP revised down to negative 2.9 percent for the first quarter of 2014.
- Steep contraction in healthcare consumption to blame, this number came in at -1.4 percent.
- Expect the GDP to grow between 2.5 to 2.7 percent for the second quarter. If this happens, then we have a contraction for the first half of 2014.
We had been expecting the U.S. economy to bounce back strongly in the second half of the year. Then came the revision of the gross domestic product that was revised downward by 2.9 percent. This is the worst drop off since the Great recession and was fueled by a large cutback in healthcare spending.
What does this mean? Any expectations for a nice healthy, strong recovery has been dashed. We can expect moderate growth at best. Even if we get a strong second quarter growth of three percent, this means first quarter growth was zero. Even if we get the expected three percent in the fourth quarter as well, the U.S. GDP, for the year will grow at an okay two percent if not less.
The severe winter weather was a factor n Q1 and the number would not have been as bad if the weather had been more moderate. However, the second quarter bounce back does not look as strong as we had all hoped for. As for this sharp downward revision, we saw steep drop-offs in consumer spending as well as a small contribution to exports. The contribution from consumption fell from 2.1 percent to a pitiful 0.7 percent thanks to a drag on healthcare spending. We had an initial estimate of one percent for healthcare services, but in actuality it came in at -0.2 percent. The assumption that we would get a boost from the Affordable Health Care Act was a bust.
In all likelihood we are expecting the GDP to grow between 2.5 to 2.7 percent for the second quarter. If this happens, then we have a contraction for the first half of 2014. We had expected the GDP for Q1 to be revised down from one to two percent. The 2.9 percent contraction is the worst growth rate since Q1 of 2009 during the Great Recession when we saw the GDP contract by 5.4 percent.
The government had expected an increase in healthcare spending in Q1 but this was not the case. The biggest drag in that sector was thanks to a downward revision in medical services. This number was reduced from 9.1 percent year on year (YoY) to -1.4 percent (YoY). While we knew this was a possibility, such a huger downward revision in healthcare consumption was a bit of a shock.
This is not a normal situation. While we blame the winter, we have structural problems within inventory building as well as strong trade numbers dragging down Q1. Only a couple times has this happen where we have seen such a drop off in growth without being in a recession. A Q2 recovery will be job growth driven as we expect the NFP to show 190K new jobs a month on average. We also expect improvements in industrial production and manufacturing to help with modest growth. Improvements in retail sales will also help. Growth will not be strong and will not be as rosy as we expected. At best expect a 3.8 percent growth for the second half of the year which means the U.S. economy will only grow at two to 2.1 percent for 2014. Not the robust bounce back we had wanted.