June 24, 2014

AP’s Dynamic Econ Duo: Don’t Worry About Tomorrow’s Awful GDP Report; ‘The Recovery Continues’

Sounding a familiar theme at the Associated Press ahead of awful economic news, Christopher Rugaber and Martin Crutsinger prepared a column in advance of tomorrow’s final report on the economy’s first-quarter economic contraction reminding us, with far more certainy than is justified, that “A GRIM US ECONOMIC PICTURE IS BRIGHTENING.”

Guys, before you “brighten,” you first have to step out of the darkness. According to the wire service’s dynamic duo of reporting on the economy (I guess I could add Josh Boak and call them “the three amigos”), tomorrow’s report on the nation’s first-quarter Gross Domestic Product is expected to show that it contracted by “nearly 2 percent” on an annual basis. AP reports a week ago didn’t include “nearly.” Bloomberg News is currently predicting a contraction of 1.8 percent. I’d like to be wrong, but I’m concerned that it might be significantly worse. But Rugaber and Crutsinger say, “Don’t worry, be happy; the rest of the year will probably be fine” (bolds and numbered tags are mine):

WHY A GRIM US ECONOMIC PICTURE IS BRIGHTENING

CrutsingerAndRugaberTwitters

When the government updates its estimate Wednesday of how the U.S. economy fared last quarter, the number is pretty sure to be ugly. Horrible even.

The economy likely shrank at an annual rate of nearly 2 percent in the January-March quarter, economists estimate. That would be its bleakest performance since early 2009 in the depths of the Great Recession.

So why aren’t economists, businesses or investors likely to panic?

Because most agree that the economy last quarter was depressed by temporary factors – particularly the blast of Arctic chill and snow that shuttered factories, disrupted shipping and kept Americans away from shopping malls and auto dealerships. [1]

Since then, the picture has brightened. Solid hiring, growth in manufacturing and surging auto sales have lifted the economy at a steady if still-unspectacular pace. That said, sluggish pay growth and a stumbling housing rebound have restrained the expansion. But the economy’s recovery continues. [2]

“We had a very bad first quarter, but the first quarter is history,” says Craig Alexander, chief economist at TD Bank. “It doesn’t tell you where the economy is going, which is in a direction of more strength.”

Wednesday’s report will be the government’s third and final estimate of the economy’s first-quarter performance. Here are five reasons economists are looking past last quarter’s dismal showing and five reasons the economy still isn’t back to full health.

HIRING IS ROBUST
… WINTER BLAST
CLEARING OUT STOCKPILES [3]
HEALTH CARE COMPLICATIONS [4]
… MANUFACTURING GAINS

Most analysts think the economy is growing at a 3.5 percent annual rate in the current quarter and will expand at a 3 percent rate for the rest of the year. The Federal Reserve foresees a similar improvement.

To be fair, the AP pair cited five “signs that the economy still hasn’t achieved full health”: housing slowdown, higher gas prices (with a question mark), stagnant wages, long-term unemployment, and unemployment not as good as it looks.

But let’s look at the tagged items above.

[1] — Nobody has adequately explained why the winter of 2014 should have caused such a sharp reversal of fortune from the previous quarter’s +2.6 percent annualized figure. As I noted last month:

Here are all of the first quarter contractions in the past 50 years: 2011, 2009, 2008, 2001, 1991, 1982, 1975, 1974, and 1970.

2011 wasn’t blamed on weather, because after all initial revisions, the government had the quarter’s growth pegged at an annualized +1.9 percent. Comprehensive revisions in July 2012 and 2013 (Table 2A at link) took that quarter’s result down first to an annualized +0.1 percent, and then to -1.3 percent.

The contraction in 2009 occurred during the previous official recession. Nobody blamed the weather for the decline in the first quarter of 2008, which was followed by a positive second quarter.

All of the other first-quarter contractions occurred partially or entirely during officially declared recessions.

1977 and 1978 (especially 1978) were noteworthy for extraordinary low temperatures and brutal storms which shut down entire regions of the country for days. During those two winters, the thermometer 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.

Even the global warming promoters at the National Oceanic and Atmospheric Administration can’t make a case that this past winter was somehow unprecedented …

The elephant in the room is Obamacare. See point [4].

[2] — For heaven’s sake, guys. A recovery doesn’t “continue” after a quarter of contraction, especially one you yourselves described as “horrible.” It “resumes” or “returns” (we hope). Isn’t it absolutely astonishing that everyone is writing about a “recovery” almost five years after the official end of the recession in June 2009?

[3] — The clearing out of stockpiles may get rid of inventories’ negative effect on GDP. Despite April’s increase, it’s way too early to credit inventories for a positive second-quarter contribution. If there isn’t one, that will put pressure on the other GDP factors to come through at an above-average rate.

[4] — The “complications” are twofold. First, it’s pretty clear that healthcare spending has decreased. Why wouldn’t it, given Obamacare policies’ huge deductibles? The second factor is the unclear impact of Obamacare on GDP data, which may not be sorted out for some time. The track record of this year so far has been, “the more you know, the worse it looks.” I don’t see why that should change in future quarters.

The AP pair also ignored the deteriorating trade situation, which is the other principal reason why tomorrow’s reported contraction is predicted to be worse than May’s estimate of 1 percent.

Five years into a “recovery” which bears a far closer resemblance to the economy of the 1930s than any legitimate recovery since, it simply never occurs to these guys to wonder if the “solutions” promulgated by the Obama administration and the Federal Reserve really aren’t working out the way they’re supposed to — or that maybe the people involved really don’t want the economy to grow all that much.

For more on why this contention is not at all unreasonable, see James Pethokoukis’s “Team Obama: Sorry, America, the ‘new normal’ may be here to stay.”

Isn’t it strange how that “new normal” is totally not present in the administration’s or Congressional Office’s long-term budget projections?

Cross-posted at NewsBusters.org.

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