By Steve Eggleston
On Wednesday, the Bureau of Economic Analysis released its third and final regular estimate of Gross Domestic Product, and the news was very bad. Real, or inflation-adjusted, GDP contracted by 2.9% on an annualized, seasonally-adjusted basis, 1.9 percentage points worse than the 2nd estimate of 1.0%. That drop is the largest between the 2nd and 3rd estimates since at least 1976, and the 2.9% inflation-adjusted contraction is the 17th-worst performance since quarterly estimates began in 1947.
The news is even worse on the nominal, or non-inflation-adjusted, front. Nominal GDP contracted by 1.7% on an annualized, seasonally-adjusted basis, the first contraction since the Great Recession, the 10th-worst quarterly performance on record, and other than the heart of the Great Recession (4th quarter of 2008 and 1st quarter of 2009), the worst performance since the 4th quarter of 1960.
The biggest driver of the downward revision was the incorporation of actual numbers for health care spending. While the 1st estimate had spending on health care increasing by 9.9% and the 2nd estimate had it increasing by 9.1%, the actual spending on health care decreased by 1.4%. In terms of what that meant to the change in real GDP, the 1st estimate had health care spending contributing +1.17 percentage points to the +0.1% GDP growth, the 2nd estimate had it contributing +1.01 percentage points to the -1.0% GDP contraction, and the actual numbers had it contributing -0.17 percentage points to the -2.9% GDP contraction.
ZeroHedge pointed out that 2nd-to-3rd estimate revision of health care spending is highly unusual, and something not seen in the prior 4 quarters. The reason it happened – instead of using wage and employment data in the first 2 estimates of GDP, the BEA used PlaceboCare enrollment data and Medicaid spending.
A side note before I continue – the reason my co-blogger Shoebox and I call it PlaceboCare instead of ObamaCare is because its effects on health care and the economy are like giving a diabetic a heap of sugar pills and telling that diabetic it’s “medicine”. Between that and the abandonment of any notion of repeal by Republicans, I figure it fits better.
Even though the BEA said that they won’t “regularly” include PlaceboCare data into GDP estimates, there’s a few questions that really need to be asked of the BEA, especially since the White House spin at the end of April was that, but for PlaceboCare, the economy would have contracted, followed by the end-of-May spin that, but for PlaceboCare, the economy would have cratered even worse:
- Who ordered that radical change in the first place?
- Was that change done only after it was determined that using the normal method of estimation would result in a contraction and using PlaceboCare/Medicaid data would not result in a contraction?
- Under what conditions will PlaceboCare/Medicaid data be used again?
The wild discrepancy between PlaceboCare-driven estimates of health care spending and actual health care spending is yet another datum point in the universe of data that the claims PlaceboCare is a positive, 8 million people enrolled in it, and 4 million previously-uninsured now have health insurance, are nothing more than a bunch of fetid macaca.
As for what the crater means going forward, it depends on who one asks. Goldman Sachs took the opportunity to up its 2nd-quarter estimated GDP growth from +3.8% to +4.0% specifically because of the bad-news 1st-quarter report and the worse-than-expected headlines on the May durable goods report released at the same time. Meanwhile, Tom Blumer noted two different AP stories where some economists knocked down their expectations to as low as +2.5%. Of note, assuming there is no further revision of 1st-quarter of 2014/4th-quarter of 2013 GDP*, it would take a tick over +3.0% real GDP growth (3.01%, actually) in the 2nd quarter just to get to where real GDP was at the end of 2013.
So, who will be right? History isn’t kind to the optimists – every quarter that saw a -1.5% GDP contraction or greater since 1947 came either during or immediately prior to a recession. That May durable goods report, despite Goldman’s protestations, is also not a good sign – whether one looks at overall durable goods orders or the non-durable-goods orders Goldman and much of the Presstorian Guard – Business Division pinned their hopes on, May durable goods orders were behind March’s. Worse, personal expenditures, the single largest component of GDP, declined in inflation-adjusted terms in both April and May.
* The BEA will get another crack at the GDP numbers from the 1st quarter, as well as from (at least) 2011 through 2013, next month when it releases its annual revision of GDP along with the advance estimate of 2nd-quarter GDP. I have no doubt that there will be a positive number describing real GDP growth for the 2nd quarter. What I do doubt is that real 2nd-quarter GDP will be greater than $15,824.2 billion (in 2009 chained dollars), which is what it was as of Wednesday.