May 29, 2014

1Q14 Gross Domestic Product, First Revision (052914): An Annualized 1.0% Contraction

Filed under: Economy,Taxes & Government — Tom @ 7:48 am

Note: This “live blog” post originally appeared just after 7:30 a.m., and will be periodically updated before and after the GDP report’s release.



In April, following third- and fourth-quarter 2013 performances which came in at annual rates of 4.1 percent and 2.6 percent, respectively, and sustained bouts of rough winter weather around much of the country in January and February, the consensus prediction was that the government’s first report on first-quarter 2014 growth would show that the economy grew at a 1.1 percent annual rate.

The actual reading was the lowest possible positive result, i.e., an annual rate of 0.1 percent. Growth in personal consumption was weaker than expected. Fixed business investment exclusive of inventories declined. Exports fell sharply.

In the past few weeks, additional government and other reports have indicated that the first quarter was even weaker than initially thought.


What to watch for:

Other economic reports released in the past few weeks point towards an upward GDP revision in personal consumption of goods, a downward revision in exports, and a bigger hit from inventories.

The report will be here at 8:30 a.m.

Other pre-release commentary:

  • The New York Post’s John Crudele (“Grim, dim & puny”) dishes out a heavy dose of sarcasm — “don’t worry – it was the snow and the cold and, you know, things that only God can control.”
  • CNBC’s Patti Domm (“Here’s why markets should look past negative GDP”) — “First-quarter GDP could ultimately be revised to a positive number in the third and final reading next month.” Domm also quotes an Deutsche Bank’s chief U.S. economist Joseph LaVorgna predicting 4.2 percent annualized growth in the second quarter.

HERE IS THE REPORT (full tables link): The overall number is worse than anyone thought —

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 1.0 percent in the first quarter according to the “second” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.6 percent.

The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, real GDP was estimated to have increased 0.1 percent. With this second estimate for the first quarter, the decline in private inventory investment was larger than previously estimated.

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

… The downturn in the percent change in real GDP primarily reflected a downturn in exports, a larger decrease in private inventory investment, and downturns in nonresidential fixed investment and in state and local government spending that were partly offset by an upturn in federal government spending.

… Profits from current production (corporate profits with inventory valuation adjustment (IVA) and
capital consumption adjustment (CCAdj)) decreased $213.4 billion in the first quarter, in contrast to an increase of $47.1 billion in the fourth.

Here is how the contributions to GDP changed by major component:


By far the biggest revision was in inventories. This may be weather-influenced, but the disappointing Christmas shopping season may also have weighed on many retailers who have decided to keep their on-hand stocks at minimal levels.

Quick Reactions:

  • Associated Press — “The U.S. economy was battered even more than first suspected by the harsh winter, actually shrinking from January through March. But economists are confident the contraction was temporary.”
  • Bloomberg — “The last time the economy shrank was in the same three months of 2011. The median forecast of economists surveyed by Bloomberg called for a 0.5 percent drop. A pickup in receipts at retailers, stronger manufacturing and faster job growth indicate the first-quarter setback will prove temporary as pent-up demand is unleashed.”
  • Reuters via CNBC (“Frigid winter takes toll as US GDP contracts for first time in 3 years”) — “The U.S. economy contracted in the first quarter for the first time in three years as it buckled under the weight of a severe winter, but there are signs activity has since rebounded.”
  • Wall Street Journal — “Most economists predict the U.S. economy will bounce back in the second quarter, though it isn’t clear how strong of a rebound is in the works. Gauges of industrial production, retail sales and durable-goods orders all rose in February and March before weakening in April. Even if it is temporary, the first-quarter downturn reflects a pattern seen repeatedly over the past five years. The worst recession since the Great Depression ended in June 2009, but the economic recovery has struggled to gain traction.”
  • Zero Hedge — “if one excludes the artificial stimulus to the US economy generated from the Obamacare Q1 taxpayer-subsidized scramble, which resulted in a record surge in Healthcare services spending of $40 billion in the quarter, Q1 GDP would have contracted not by 1% but by 2%!”




  1. Something tells me the press is being a bit too pessimistic so they (and the administration they work for) can tout a -0.3% drop as “unexpectedly good news”.

    Comment by steveegg — May 29, 2014 @ 7:54 am

  2. It’s a good thing I’m not a prognosticator – that -1.0% was bitterly disappointing.

    Comment by steveegg — May 29, 2014 @ 8:34 am

  3. I can only say that I had a feeling it would come in worse, only because everyone is ignoring the Obamacare drag.

    Comment by Tom — May 29, 2014 @ 8:38 am

  4. First impressions:

    - The instant spin that the (revised) drop in non-farm inventories (-1.54 points toward real GDP percentage change) is good news isn’t really good news – final sale of goods only contributed +0.16 points toward real GDP percentage change.

    - Take out increased spending on health care (revised to +1.01 points) and financial services/insurance (+0.23 points), and we’re talking an over-2 point drop in real GDP.

    Comment by steveegg — May 29, 2014 @ 8:42 am

  5. The financial services/insurance component increase is probably also healthcare-related.

    Comment by Tom — May 29, 2014 @ 9:00 am

  6. I somehow doubt the decline in inventory change (-0.95 points toward GDP change in non-farm) is weather-related. March was quite mild compared to January/February.

    I really should look at this further to see if it actually means something, but over the last 3 quarters, non-farm inventory change was worth a net +0.16 percentage point increase toward total GDP change, with the PCE goods expenditures adding a total of +1.86 points over the same period.

    Comment by steveegg — May 29, 2014 @ 9:16 am

  7. I’m seeing the four previous quarters as +1.94 in nonfarm inventories. The 5th previous quarter was -2.00.

    I think that retailers, who I believe went into Christmas trying not to be overstocked, STILL ended up having too much on hand and had to deeply discount. The last thing they want to do now is engage in another build-up. If you believe the media, they’re going to be caught short in the late-second and third quarters. I’m not buying. I’m seeing what retail traffic looks like around here, and it stinks.

    Comment by Tom — May 29, 2014 @ 9:28 am

  8. I remember some brutal weather in the 70s, 80s and 90s and don’t recall an economic contraction during any of those times.

    Comment by H.R. — May 29, 2014 @ 1:06 pm

  9. #8, Great point. Meant to look that up earlier.

    Here are all the negative 1Qs in the past 50 years: 2011, 2009, 2008, 2001, 1991, 1982, 1975, 1974, 1970.

    2011 wasn’t blamed on weather. It was actually positive until the govt. did a comprehensive revision either last year or the year before.

    2009 was during the real recession. 2008 was a hiccup followed by a positive quarter.

    2001, 1991, 1982, 1975, 1974 and 1970 were during ongoing recessions.

    The coldest years I recall were the Winters of 1977 and 1978, where it hit -24 and -25 for real without wind chill in Cincinnati. The Ohio River froze in one of those two years. GDP growth was an annualized 4.7% and 1.4% in 1Q77 and 1Q78, respectively.

    This weather excuse is such bullish*t.

    Comment by Tom — May 29, 2014 @ 1:23 pm

  10. Here are all the negative 1Qs in the past 50 years: 2011, 2009, 2008, 2001, 1991, 1982, 1975, 1974, 1970.

    Well Tom, if the narrative by liberals that it was the weather, then I observe that four of the eight 1Qtr negatives (half) occurred in the last 13 years, IT MUST BE GLOBAL COOLING. /snark/ Shock! Climate Change is real since since the earliest three are clustered in the decade of the 70s in which we had the Ice Age scare!

    Comment by dscott — May 29, 2014 @ 4:44 pm

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