The first quarter just keeps looking worse.
U.S. gross domestic product, the broadest measure of goods and services produced in the economy, shrank at a 2.9 percent rate in the first three months of the year, the Bureau of Economic Analysis said Wednesday. That’s even worse than the 1 percent rate of contraction reported by the BEA in an estimate last month, which was itself a downward revision from the (positive) 0.1 percent rate of growth that the government initially reported in April. The first quarter now stands as the worst since the middle of the recession.
The revision itself wasn’t much of a surprise, although the magnitude of it was. The government’s early GDP reports come out before all the data is available, which means it has to base its estimates on assumptions. One key assumption this time was that Americans would spend a lot more on health care because of the Affordable Care Act. Turns out, that was wrong; health spending actually fell in the first quarter for the first time since 2011.
Economists have been mostly unfazed by the news. The weak start to the year was almost certainly due in part — possibly in large part — to the brutal winter in much of the country. Other indicators, such as hiring, didn’t drop off nearly as much, and the ones that did generally have looked much better since the snow melted. Most economists expect growth of 3 percent or more in the second quarter.
But don’t be too quick to dismiss Wednesday’s rotten GDP number. Last month, I noted that negative quarters are rare outside of recessions. Quarters this bad are even rarer. There have been only two other non-recessionary quarters since World War II when the economy shrank at a rate over 2 percent. Both times, the economy entered a recession the following quarter.
That doesn’t mean we’re about to fall back into a recession. On several other occasions, negative quarters were followed by a strong rebound. Just a few years ago, for example, U.S. GDP fell 1.3 percent in the first quarter of 2011, then bounced back to post a 3.2 percent growth rate in the second quarter.
Then again, it’s worth remembering that we’re notoriously bad at predicting recessions. In fact, we aren’t even very good at knowing when we’re in one. The semi-official arbiters at the National Bureau of Economic Research didn’t identify the most recent recession until December 2008, by which point it had been underway for a year; they didn’t pick up on the 2001 recession until it was over. If we were in a recession now, we might not know it.
Wednesday’s report is also notable for the size of the revision. We’ve noted before that preliminary GDP data is notoriously unreliable; on average, the figure gets revised by 0.6 percentage points between the “advance” (first) and “final” (third) estimates. (Despite its name, the final estimate isn’t final; it’s just the last time the number gets revised in the normal quarterly cycle. Later revisions, sometimes made years later, can be even bigger.) But even by those standards, the nearly 3 percentage-point swing between the April and June estimates is big. In fact, this appears to be the biggest such revision since at least 1991, which is far back as I could go using the St. Louis Fed’s “ALFRED” system, which compiles historical economic data. (Data for the fourth quarter of 2008 was revised by even more, but only later, not as part of the normal quarterly cycle.)