Economy Watch: GDP Drops Through Floor in Q1

By Dees Stribling, Contributing Editor

Real gross domestic product decreased at an annualized rate of 2.9 percent in the first quarter of 2014 according to the third and final estimate by the Bureau of Economic Analysis, which was released on Wednesday. The contraction was a complete reversal from the previous quarter; in the fourth quarter of 2013, real GDP increased 2.6 percent.

The final GDP estimate is based on more complete source data than were available for the second estimate last month. In the second estimate, real GDP was estimated to have dropped only 1 percent. But the increase in personal consumption expenditures—people out spending—was smaller than previously estimated, mainly because of the awful winter, and the decline in exports was larger than previously estimated.

Also, there was a strong inventory drawdown by businesses that amounted to a 1.7 percentage point drag on growth. One other factor in the GDP contraction was more surprising: a drop in spending on healthcare, which rarely goes down. The healthcare decline amounted to a 1.2 percentage point drag on growth.

The question now is whether the first quarter is an anomaly, or a harbinger of a weaker overall economy. Preliminary indications are that the second quarter—which ends in a few days—has been much stronger than the Q1. Even so, when the full story of the U.S. economy in 2014 is finally told, the first quarter will act as a drag on the year’s overall growth.

Durable goods orders dip

Orders for U.S. durable goods dropped unexpectedly by 1 percent in May, according to the Census Bureau on Wednesday, following a rise of 0.8 percent in April. All of the drop, however, can be chalked up to a contraction in durable goods orders by the U.S. military. Take military orders out of the equation for the month, and durable goods orders actually rose by 0.6 percent in May.

Take transportation equipment out of the overall equation, and the May decrease was only 0.1 percent. The government considers an item a durable good if it’s designed to last three years or more.

Wall Street shrugged off the GDP and durable goods news on Wednesday, with the Dow Jones Industrial Average gaining 49.38 points, or 0.29 percent. The S&P 500 was up 0.49 percent and the Nasdaq advanced 0.68 percent.