On the turning away, from the pale and downtrodden. And the words they say, which we won’t understand. “Don’t accept that what’s happening, is just a case of others’ suffering, or you’ll find that you’re joining in the turning away.” It’s a sin that somehow light is changing to shadow, and casting it’s shroud over all we have known. The opening lines to Pink Floyd’s 1987 album, A Momentary Lapse of Reason seem to sum up how I am feeling after seeing the Bureau of Economic Analysis (BEA) latest GDP revision for the first quarter of 2014 – nearly a 3 percent drop.
The revised quarterly decrease of 2.9 percent is the largest fall in GDP since the 5.4 percent decline during the first quarter of 2009 at the height of what some have labeled The Great Recession. In only 16 of the 268 quarters following World War II has GDP in the United States fallen by this much. The last time a quarterly decrease was this large (outside of the Great Recession) was during the savings and loan crisis at the beginning of 1990.
We have previously reported that the weak GDP numbers during the first quarter would have been worse had not the Affordable Care Act pushed spending for health insurance up by dramatic amounts. Interestingly, in this revision the huge growth in health care spending has disappeared.
Looking at the data in detail, in May, the BEA was suggesting that spending on health care had risen by $39.9 billion, leading to an “increase” in GDP of 1.01 percentage points. In its revised numbers, the BEA says that this change was now a reduction of $6.4 billion. This is a huge swing. While it is not possible to know if the data are reflective of people not paying for insurance through the Exchanges, or if insurance subsidies had been miscalculated, there is something significant here, at least during the first quarter.
This change alone accounts for most of the swing in GDP between the two estimates – leading to a change from -1.0 percent to -2.17. Most of the rest comes from a reduction in the estimates of export sales.
What is not shown in these top line numbers is the collapse in investment activity in the first quarter of 2014. Many pundits have interpreted this as a “weather effect,” since in spite of global warming, the average temperature in the United States in the first quarter was 34.39 degrees, about 4 percent colder than the same time during the prior year. I personally do not buy this explanation for two reasons. First, the BEA seasonally adjusts the data, meaning that it controls for bad weather in parts of the country during the first quarter. In addition, the reductions in first quarter investment are broad based, falling by 7.5 percent for non-residential buildings, 5.0 percent for residential buildings, and 3.1 percent for equipment. Not since the first quarter of 2011 has investment decreased by this sort of magnitude. Also, there were large investments in structures during the earlier part of 2013 which tailed off as the year went on. This may simply mean that the building boom (if one could call it that) is finally ending.
The past recession, like all recessions came about because business decisions sometimes happen at a slower pace than markets want. This leads to what Austrian economists call mal-investments, Keynesian economists call inventory accumulation, Schumpeter described as creative destruction and classical economists attribute to monopoly. Once a recession happens, the economy will “turn away, from the pale and downtrodden.” This time, the economy never went into a growth mode and as one of the more brilliant economists I have worked with once said – there is not much of a difference between 1 percent growth and 1 percent decline. With slow growth it is very easy to slip into negative because of bad weather, investment decisions or because people are sitting home watching the World Cup. What we need to worry about is that somehow light is changing to shadow, and casting it’s shroud over all we have known, and these first quarter numbers are just the beginning – of the next recession.