U.S. Economy: The Muddle Gets Deeper

June 25, 2014 2:31 PM
By Milton Ezrati

While a far larger-than-expected decline in revised first-quarter GDP does not signal recession, it does point to continued subpar growth.  

Though a downward revision in first-quarter U.S. gross domestic product (GDP) was widely expected, the actual change reported by the Commerce Department on June 25 was more severe—and troubling for that reason alone. Instead of the previous estimate of a 1.0% annualized rate of decline in real GDP reported on May 29, the revised data revealed a 2.9% decrease. Economists surveyed by Bloomberg projected a 1.8% drop.

Almost every major economic category in the report was revised downward, leaving a question of why the Commerce Department even bothered with the earlier estimate. These data still point to adverse winter weather as a major cause of the weakness. Residential and commercial construction spending, probably the most sensitive areas to weather, were all down sharply, as in the earlier estimates. But this new picture indicates that, unlike the impression created by the May 29th report, weather can no longer shoulder all the blame. Real consumer spending, for instance, was reported up at only a 1.0% annualized rate, a major contrast to the 3.0% rise reported last month. The biggest downward revision in the consumer segment occurred in nondurable goods sales, hardly a weather-related item. 

For all the concern raised by the big downward revision, it is significant still that, as originally reported, a slowdown in inventories detracted the most from growth in the first quarter. Without this effect, real final sales rose at a 1.2% annualized rate—soft, but far from negative territory. Since such inventory effects are typically temporary, there is every reason to dismiss the prospect of recession, a forecast that will inevitably gain currency among financial commentators from this revision. Instead, look for a continuation of the subpar recovery that has typified the past few years.

Milton Ezrati is Partner, Senior Economist and Market Strategist for Lord Abbett.

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