How’s the economic recovery going? Not well according to new estimate of first quarter GDP from the Commerce Department. The U.S. economy shrank 2.9% in the first quarter. That’s a sharp decline from the last estimate of 1% contraction. Economists pegged today’s number at 1.8% with the worst estimates coming in at 2.4%.
Why the big revision lower? Personal consumption expenditures tanked from 3.1% to 1%. Those looking for a recovery on the backs of the consumer may have to start looking elsewhere.
How did the government get consumer spending so wrong? They assumed Obamacare would boost health-care spending in the first three months of the year. Turns out, health-related spending actually fell $6.4 billion instead of rising by the expected $39.9 billion.
Other revisions came from exports, imports and inventories. Inventories expanded less than expected at $45.9 billion from initial reports of $51.6 billion.
Wall Street remains convinced the big drop in GDP is weather related. With a drop of 2.9%, not all of it can be weather related. Health-care spending, for example, did not miss horribly because it snowed. Plus, El Nino is coming. I guess it needs to be 70 degrees and sunny for the economy to function.
Second quarter GDP is expected to bounce back. Right now, estimates are putting the U.S. growth at 3.6% in the second quarter and continuing that momentum throughout the second half of 2014. Data in recent months has improved, but it has been a bit of a mixed picture. Another recession (two quarters of shrinking GDP) is unlikely.
How’s Wall Street reacting to today’s news? Moving higher of course. A report showing an expanding service sector was enough to overcome the latest GDP numbers and a worse than expected durable goods report.