What in the world was that U.S. GDP downgrade all about?! In case you’re just starting to catch up to the latest market events, allow me to go ahead and tell you that the U.S. economy contracted by a jaw-dropping 2.9% for the first quarter of the year!
Analysts pointed out that the recent GDP reading marks the worst contraction since Q1 2009, back when the financial crisis was still haunting the global economy. The negative growth reading is also the biggest GDP decline to follow a prolonged expansionary phase since World War II. No wonder folks over at the White House scrambled to reassure market watchers right away by saying that the U.S. economy was much stronger than the figures suggested.
A closer look at the components of the GDP revisions shows that the drop in U.S. exports was underestimated and that consumers actually spent much less than initially reported. In particular, spending on healthcare was downgraded significantly from a 9.1% increase to a 1.4% decrease. Higher imports and larger stockpiles also contributed to the negative revisions for the final GDP reading.
However, several economic hotshots also pointed out that this massive GDP downgrade isn’t such a big deal. Say what?
For one, it was already known that extreme weather conditions were responsible for much of the slowdown in jobs and spending during the first few months of the year. This has been brushed aside by Fed Chairperson Yellen and her fellow policymakers as a seasonal factor, saying that economic activity is likely to make a strong comeback in the succeeding months.
Aside from that, the formal launch of the Affordable Care Act a.k.a. Obamacare in January is also to blame for the sudden drop in healthcare spending. Critics of the policy claim that Obamacare led several citizens to delay their health-related purchases as they were forced to let go of their desired health insurance policies, also causing a decline in personal spending as a larger chunk of disposable income was allotted for potentially higher healthcare costs.
It’s also important to note that, apart from these one-off GDP distortions, other sectors of the economy showed promising improvements. As Obama’s chief economic adviser Jason Furman mentioned, consumer confidence is still at all-time highs, which suggests that spending could pick up sooner or later. Industrial production is up by an annualized 5.0% and vehicle sales marked their fastest year-over-year selling pace during the first quarter.
As you’ve probably guessed, the bleak headline GDP reading isn’t likely to make the Fed waver from its taper plan. Of course it remains to be seen whether Q2 GDP growth was enough to make up for the contraction in Q1 or not, and this might play a more influential role in dictating Fed policy biases. Do you think the U.S. dollar is in for a bloodbath after this dismal GDP release?