Comerica Economic Weekly

It was a fairly quiet week for U.S. economic data with one loud exception. The Bureau of Economic Analysis announced a sizeable downward revision to their estimate of 2014Q1 real GDP growth. The first estimate of Q1 GDP growth showed a paltry gain of just 0.1 percent annualized, held down by a confluence of transitory factors. The weather was very bad. The run-up in inventories that boosted 2013H2 GDP was unwinding. The federal budget sequester was still a drag on government spending. However, overall consumer spending was solid, due to an assumption about the rollout of the Affordable Care Act. The BEA assumed that consumer spending on services surged in Q1 due to pent-up demand for healthcare services.

The BEA’s second estimate showed that Q1 real GDP declined at a 1.0 percent annualized rate. Inventories were a bigger drag than first thought.

The BEA’s third estimate of Q1 real GDP showed sizeable contraction at a –2.9 percent annualized rate. Of the 268 quarters of GDP data, beginning in 1947Q2, 2014Q1 now ranks as the 17th worst quarter. Ninety-four percent of quarters since 1947Q2 were better. The reason for the large downward GDP revision from the second estimate centers on the healthcare assumption. In the third estimate, consumer spending on healthcare is no longer a major boost to GDP, but rather it is a small drag. Also, net trade, which was assumed to be a moderate drag in Q1 GDP in the first and second estimates, is now assumed to be a large drag.

The difference in real GDP growth of +0.1 percent in the first estimate, to –2.9 percent in the third estimate is huge. Prior to the Q1 estimates, the average revision from the first to the third estimate of GDP was 0.6 percent. Q1 was an exceptional quarter. Not only because it was the 17th worst GDP quarter since the end of World War II because of the unfortunate confluence of transitory events, but also because it was one of the most difficult for the BEA to estimate.

We continue to expect a rebound in real GDP growth for the current second quarter of around +2.5 percent.

Income and spending data for May are consistent with this complex characterization of the U.S. economy. Nominal personal income increased by 0.4 percent in May. The PCE price index was up 0.2 percent in May, the third month in a row at a 0.2 percent gain. After adjusting for inflation and taxes, real disposable income was up by 0.2 percent in May. Real consumer spending dipped by 0.1 percent, bringing the personal saving rate up to 4.8 percent.

New orders for durable goods decreased by 1.0 percent in May, following three consecutive increases.

For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 06-27-14.

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