Coverage: U.S. economy falters

The U.S. economy lost the most since the end of the recession, indicating that optimism might be premature.

Jonathan House wrote for The Wall Street Journal that the gross domestic product sank to a five-year low:

The U.S. economy contracted at a faster pace than previously estimated in the first quarter, marking its sharpest pullback since the recession ended five years ago.

Gross domestic product, the broadest measure of goods and services produced across the economy, contracted at a seasonally adjusted annual rate of 2.9% in the first three months of the year, according to the Commerce Department’s third reading released Wednesday. That was the fastest rate of decline since the first quarter of 2009, when output fell 5.4%, and matches the average pace of declines during the recession.

“GDP was recession-like in the first quarter, although most other data clearly signal that the decline is an outlier,” said Jim O’ Sullivan, economist at High Frequency Economics.

In its third GDP reading, based on newly available data, Commerce said first-quarter consumer spending and exports were even weaker than previously estimated. Consumer spending growth was lowered to 1% from 3.1% previously, largely because health-care spending was weaker than previously estimated.

Early second-quarter data indicate the economy has improved this spring as warmer weather helped release some pent-up demand. Macroeconomic Advisers Wednesday forecast the economy will grow at a 3.3% annual rate in the April to June period. But the economy’s stumble in the first three months of the year has once again dashed hopes the recovery was on the verge of switching into a higher gear.

The New York Times’ Neil Irwin had this analysis about the numbers and what they might mean:

What makes the sharply negative number all the more stunning is that it didn’t feel like an economic contraction at all in the first quarter. Employers kept adding jobs. Many measures of business activity and consumer confidence were stable. And forecasters are expecting a healthy pop of growth in the second quarter, which ends next week.

But the economy was hit by an unlikely combination of negative forces that conspired to turn what seemed set to be another quarter of so-so growth into a considerably more gloomy experience.

Economists had expected the revised number to show contraction, though they expected a less bad number than the one that materialized. One key thing they missed: Consumer spending, the mainstay of economic activity, was far weaker than either government numbers or private analysts had thought — particularly spending on health care.

Previous G.D.P. numbers, released in late May, showed that health care spending contributed 1 percentage point to economic growth. The new report now finds that health care spending actually subtracted 0.16 of a percentage point from the growth rate. The health care spending data in G.D.P. is a measure of how much President Obama’s health reform law is reshaping health care spending patterns, and it is now showing opposite results from those reported two months ago, when the first-quarter data was initially released.

Investors didn’t seem to care. USA Today reported in a story by Ed Brackett that stocks rose despite the news:

Stocks broke a two-day losing streak and closed higher Wednesday as investors shrugged off the surprising news that the economy in the first quarter shrank 2.9% — a much bigger contraction than the government previously reported.

The Dow Jones industrial average rose 50 points, or 0.3% to 18,868, according to preliminary calculations. The Standard & Poor’s 500 index gained 10 points, or 0.5%, to 1960 and the Nasdaq composite index jumped 30, or 0.7%, to 4380.

CBS and other broadcasting stocks are up after the U.S. Supreme Court ruled that Web TV startup Aereo could no longer capture their signals and stream them over the Internet to subscribers.

Matthew Phillips and John Tozzi wrote for Bloomberg Businessweek that a drop in health care spending was the cause of the decline:

The big surprise in the first quarter was the dip in health-care spending. The U.S. spent $6.4 billion less on health care in the first quarter than in the last quarter of 2013. Government statisticians initially forecast a 9.9 percent increase in health-care spending—and what we got was a 1.4 percent decline. Considering all the millions of previously uninsured people who are gaining access to health insurance under the Affordable Care Act, how can they be shrinking so dramatically?

Health-care costs overall have been increasing more slowly in recent years compared with the pace before the 2007-09 recession. Slow growth in the price of health-care services combined with a decline in utilization—the amount of health care people consumed—in the first quarter. So lower costs and greater access translated into lower consumption. That’s a head-scratcher.

Some people saw this big revision coming, based on the method the Bureau of Economic Analysis uses to make its estimates, as Austin Frakt pointed out on the Incidental Economist blog last month. To estimate the effect of Obamacare in the first quarter, the BEA initially relied on trends in Medicaid spending, because it could not directly capture spending by people newly enrolled in private insurance.

No matter the cause, here’s hoping the news doesn’t spook consumers. Just as people are starting to buy homes, cars and other big items, this could cause them to delay purchases due to concerns about their jobs or incomes. Either way, the numbers were a surprise and cast a pall over the second quarter.