With the story about Senator Thad Cochran (R-MS) defeating TEA Party challenger, state Senator Chris McDaniel, in the Republican primary run-off election, a more important story — at least, in my opinion — hasn’t been getting the coverage it deserves. From The Wall Street Journal:
U.S. Economy Shrinks by Most in Five Years
Final Revision for First-Quarter GDP Shows 2.9% Contraction
By Jonathan House | Updated June 25, 2014 11:27 a.m. ET
WASHINGTON—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.
More at the original.
As we noted previously, economists got the first revision wrong: economists had projected that the initial 0.1% growth rate estimate would be revised downward to -0.6%, when the actual revision was down to -1.0%. And now, what do we see from the current story?
Economists surveyed by The Wall Street Journal had predicted Wednesday’s report would revise GDP growth down to a 2% decline.
Well, at least they are (somewhat) consistent, consistently missing the target by a third!
We’ve said it before: relying on the projections of economists for what proposed policies will do is a pretty chancy thing, when you have professional economists, surveyed by as august a publication as the Journal, who are that much off not on projections for the future but measurements concerning what has already happened.
And now, from Fortune:
Yellen paints a gloomy picture for U.S. economy
The Fed has continued to lower its expectations for economic growth.
by Chris Matthews @crobmatthews JUNE 18, 2014, 5:50 PM EDT
The economists at the Federal Reserve practice what is known as the “dismal science,” but their projections for economic growth have been anything but pessimistic.
In fact, the Fed has consistently overestimated how quickly the economy would grow ever since the financial crisis. The following chart from Guggenheim Partners shows how the Fed’s economic growth expectations last year dropped precipitously as 2013 grew closer. In the end, even their final prediction of GDP growth of roughly 2.1% was optimistic, as the economy only grew 1.8% last year.
And the Fed’s at it once again, as it reduced its estimate for GDP growth in 2014 by more than half a percentage point, from 2.8%-3.0% down to 2.1%-2.3%. While that may not sound like much, remember that a good rule of thumb is that a single percentage point of GDP growth leads to roughly 1 million new jobs.
Given that the economy actually shrank at an annual rate of 1% in the first quarter of this year,1 a projection of 2.1% growth for 2014 implies a relatively large expected bounce back in the remaining quarters. At the same time, the Fed stuck with its projections for 2015 economic growth of 3.0%-3.2%, meaning it doesn’t expect lost economic growth this year to be made up in the years to come.
So, if the first quarter contraction was really just about the weather (as many have said), you would expect the vast majority of that economic growth to be made up in later quarters when the weather was better. Bad weather is generally thought to simply delay, rather than kill, economic activity. Furthermore, the Fed cut its projections for long-term interest rates from 4.0% to 3.75%, a change that Fed Chair Janet Yellen attributed to “a slight decline in projections for longer term growth,” in a press conference following Wednesday’s policy announcement.
A lot more at the original, but the point fits in with mine: it’s not just independent economists who have been getting the numbers wrong, but the professionals at the Federal Reserve, the ones whose economic opinions are not just ink on paper but government monetary policy in action.
At Zero Hedge, Tyler Durden noted:
Which brings us to the topic of marginal utility of debt, extensively covered here in the past. In brief, it describes how much in “economic growth” every dollar in federal debt buys. The bad news: in Q1, US total Federal debt rose by $250 billion, to a record (duh) $17.6 trillion. This debt “bought” a negative $74 billion in GDP, which declined to $17.0 trillion. Said otherwise, this was the first quarter since the end of the recession when debt rose (by a whopping amount), and when GDP declined sequentially in nominal terms.
More at the link.
Now, I have a bit of a problem with Mr Durden’s chart: note that the change to the total federal debt was negative in the second quarter and zero in the third. Those figures are not accurate. Rather, they reflect the fact that the Treasury Department simply lied, ceasing reporting of the national debt during the last debt ceiling conflict. Then, once that was resolved, all of the debt actually incurred was reported as fourth quarter debt. However, Mr Durden is discussing first quarter debt for 2014, which was (supposedly) accurately reported, and it has yielded contraction in the economy. More importantly, the first quarter of 2014 was the third quarter in a row in which the change in GDP shrank. That doesn’t fit the definition of recession, but it’s a worrisome sign. The economists that the Journal cited, who believed that GDP would grow by over 3% in this current quarter, really, really need to be right.
And they could be right, but, at the moment, I don’t have a lot of confidence it that. Since the left won’t be able to blame snow and ice for the second quarter numbers, if they are good, it will be due to President Obama’s wise policies, and if they aren’t very good, it’ll be back to blaming George Bush!
- This article was published prior to the latest GDP revision. ↩