U.S. Gross Domestic Product Shrinks at Fastest Rate in 5 Years

Drop caught economists off-guard
U.S. Gross Domestic Product Shrinks at Fastest Rate in 5 Years

Image Credits: 68751915@N05 via Flickr

by AllGov | June 28, 2014


Without sounding alarmist, the federal government announced this week that the economy nosedived during the first quarter of this year. The drop caught economists off-guard, but didn’t produce warnings of another recession.

From January to March, the nation’s gross domestic product (GDP) took a big step backwards, contracting at an annual rate of 2.9%. The decline was the sharpest in five years, going back to the 5.4% drop during the first three months of 2009.

Experts did expect some economic shrinkage during the period, but the estimates pegged it at only 1%.

Economists attributed the weak economic showing to several causes: shrinking business inventories, a terrible winter throughout much of the country, and an unexpected dip in health care spending. That sector is expected to be volatile as the new health care law, which is expected to cut spending, takes effect.

The good news is the numbers do not portend another economic downturn.

Neil Irwin at The New York Times wrote: “What makes the sharply negative number all the more stunning is that it did not feel like an economic contraction at all in the first quarter. Employers kept adding jobs at a reasonably healthy pace. Many measures of business activity and consumer confidence were stable.”

The problem, though, is that the first-quarter plummet is going to make it that much harder for the economy to produce even a so-so year for the rest of 2014.

“The brutal math of GDP means that the nation now looks consigned to another year of sluggish growth at best—and that’s true even if there is a pickup over the remainder of the year. For example, if the economy were to grow at a 4 percent pace each of the three final quarters of 2014—a level only attained twice in the last five years, and never in consecutive quarters—the overall growth rate for 2014 would still work out to only a tepid 2.2 percent,” according to Irwin. Forecasters are predicting a good second quarter, with growth at about 3.5%.

 


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