U.S FIRST QUARTER WORSE THAN EXPECTED / THE FINANCIAL TIMES

June 25, 2014 2:31 pm

US first quarter worse than expected

By Robin Harding in Washington

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The US economy shrank at an annualised rate of 2.9 per cent in the first quarter of 2014 after a dramatic set of revisions to healthcare spending.

The report was far worse than analyst expectations of a 1.9 per cent decline, and comes after the figures had already been revised down once, from the positive 0.1 per cent originally estimated in April.

But the downward revision did not appear to herald a new downturn in the US economy. About two-thirds of it was due to healthcare and most of the rest reflected weaker trade.

"In short, the larger contraction in GDP in the first quarter is not a sign that the US is suffering from a fundamental slowdown – it was still largely due to the extreme weather," said Paul Dales, senior US economist at Capital Economics in London.

"The latest data are consistent with growth in the second quarter rebounding to at least 3 per cent."

US healthcare data are in turmoil as changes introduced by President Barack Obama ripple through the system. In its earlier estimates of the first quarter, the Bureau of Economic Analysis used information on Medicaid benefits and enrolments on new insurance exchanges to estimate healthcare spending.

But for this latest estimate the BEA used a Census Bureau survey on actual healthcare spending. It did not show the same increase as the other data.

Overall, the release confirms the previous picture of a terrible first quarter, as freezing weather in the Midwestern USA closed factories, shut down transport links, kept consumers away from the shops and homebuyers away from building sites.

There was also a huge rundown in inventories, which knocked 1.7 percentage points off growth. Weather and inventories explain why the data were weak overall.
Strong consumption, largely due to how the BEA measured new sign-ups for healthcare insurance, was the one inconsistency in the earlier report.

In the first and second estimates of first quarter output, consumption grew at an annualised rate of 3 per cent, which was an oddity given how the weather appeared to hit the rest of the data.

The latest revision has stripped away that anomaly. By slashing its estimate of healthcare spending, the BEA has brought estimated consumption growth down to 1 per cent, more in line with the dismal picture in the rest of the data.

The US Federal Reserve, and most private economists, think the bad first quarter was a blip and growth will pick up again through the rest of the year.

The Fed "believes that economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter," chairwoman Janet Yellen said at her recent press conference.

But the first quarter revision may force further downgrades to estimates of growth for the whole of 2014, simply because there is more of a first-quarter loss to make up.

Copyright The Financial Times Limited 2014.