The Bureau of Economic Analysis revised real GDP growth down sharply for the first quarter in its latest revision. The U.S. economy shrank by 2.9 percent in the first quarter, progressively worse the first estimate of a gain of 0.1 percent and the first revision of a 1.0 percent decline. As such, it was the first quarterly decline in the nation’s output in three years and the sharpest drop in five years, when we were still in the Great Recession.
Of course, the larger narrative is one of disappointment. We began 2014 with a lot of optimism that this might finally be the year where the economy could gain some momentum, particularly given the strength seen in the manufacturing sector in the third and fourth quarters of 2013. I had forecast growth of 3 percent for this year at one point. With this release, we will be more likely to repeat the subpar growth rate of 2013, which was 1.9 percent.
With that said, the numbers also foretell a rebound in the second quarter. The largest drag, for instance, came from inventory spending, which reduced real GDP by 1.7 percentage points in the first quarter. Particularly given the stronger levels of activity seen in more recent data, we would anticipate stronger growth in the current quarter as businesses replenish their stockpiles.
The other significant negative on real GDP in the first quarter was net exports, which subtracted 1.53 percentage points from growth. This stemmed from an 11.4 percent decline at the annual rate in goods exports. In general, manufactured goods exports began 2014 on a weak note, and we hope that this trend begins to improve moving forward.
In terms of other components to real GDP, the main positive was consumer spending on services, which added 0.67 percentage points to growth. Nonetheless, that represented a major downgrade from the 1.92 percentage point contribution seen in the last estimate. Consumer spending on goods was also positive, but only barely so, adding just 0.04 percentage points. Much of that was from motor vehicles, but spending was dampened by weather and other uncertainties. Meanwhile, government spending continued to be a drag, with the negative impact coming primarily from the state and local level.
In conclusion, U.S. and global economic growth started off the year on a bad note. Real GDP was much weaker than we originally predicted, and while winter storms were a major factor, the data suggest that this softness went beyond weather-related influences. Fortunately, more recent data suggest that economic activity has begun to recover somewhat, with expectations of a stronger rebound for the second quarter that exceed 3 percent.
Still, these data suggest that the economic recovery – now celebrating its fifth anniversary – continues to remain fragile. Manufacturers came into this year with a lot of optimism, and while they remain upbeat about the second half of this year, these numbers indicate growth has started off slower than desired. Policymakers need to explore new ways to facilitate growth moving forward.
Chad Moutray is the chief economist, National Association of Manufacturers.
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