For U.S. GDP, it's the Bounce That Comes After the Fall That Matters

The Dow Jones Industrial Average  was up 20 points as of 1 p.m. EDT. 

This modest spike came on word from the Commerce Department that the U.S.' first-quarter economic contraction was far worse than anyone expected.

The department now estimates that gross domestic product shrank by a whopping 2.9% seasonally adjusted rate for the three months ended March 31, 2014. The last time the economy performed this poorly was in the first quarter of 2009, when GDP shrank over 5%. The fourth quarter of 2008 was even worse, with the economy losing over 8%.

The 2.9% decline is 90 basis points worse that expectations

A harsh winter, or something more fundamental?
The hope was that 2014 would be the year the U.S. economy would shed the slow-growth "new normal" status quo and return to historically normal 3.5% growth rates. But with the first quarter digging such a large hole, it is unlikely that calendar year 2014 will live up to that hope.

Economists remain optimistic that the second quarter will show a strong bounce, hanging on to the notion that the economy's sharp turn for the worse was caused by the unusually harsh winter.

Previous first-quarter GDP estimates in April and May cited health-care spending among the highlights. Today that was completely reversed. Previous estimates pegged consumer spending at a 3.1% annual growth rate -- Commerce today revised that to just 1%, driven by the newfound disappointment in the health-care sector. This revision alone subtracted 16 basis points from the previous estimates of overall growth.

US Real GDP Growth Chart

US Real GDP Growth data by YCharts.

Health care is, of course, a line item in the report we can all identify with. "Net Exports" is not, but it was just as significant to the first quarter's woes. 

The trade deficit widened substantially in the quarter, thanks to much weaker than expected net exports. Exports declined by 8.9%, approximately 50% worse than previous estimates. This imbalance subtracted a huge 1.53% from growth.

Residential investment -- home improvement, construction, etc -- fell at a 4.2% clip in the quarter. 

What to expect for Q2
Economists expect the weakness in trade to continue in the second quarter, though most think a rebound is in order in virtually every other sector of the economy. This is supported by positive reports over the past two months on the labor market,consumer confidence, and the real estate market

Current estimates put second-quarter growth in the neighborhood of 3% annualized growth, which only goes to show that "it's not how far you fall, it's how high you bounce that counts."

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The article For U.S. GDP, it's the Bounce That Comes After the Fall That Matters originally appeared on

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