Wednesday, June 25, 2014

New Data Shows Economy Shrinking Fastest Since 2009

The Commerce Department said that the economy shrank at an annualized rate of 2.9% in the first quarter, the worst quarterly figure since the beginning of 2009, and a big downturn from the previous estimate of a 1% contraction.



The economy shrank even more than previously recorded in the first quarter of this year, with gross domestic product contracting 2.9%, the worst figure for a three-month period since 2009, when the economy was still mired in the Great Recession. The figure released today by the Commerce Department is the third estimate for economic growth for the beginning of the year and shows a marked deterioration from the estimate released at the end of May, which showed the economy shrinking at an annualized rate of 1%.


If the new data holds up, it would be a remarkably large swing from quarter to quarter: The economy grew at a 2.6% annualized rate at the end of 2013. Economists surveyed by Reuters expected this latest estimate to come in at 1.7%. "There has never been a decline of more than 1.5% except during or immediately before" a recession, analysts at Goldman Sachs said in a research note.


While the unexpected contraction last quarter could be blamed on the highly volatile component of GDP "change in private inventories," which measures how much businesses accumulate in hopes of selling, the newly revised data shows weakness much more broadly throughout the economy.


For example, consumption by individuals, the stuff that people buy, grew only at a 1% annualized rate in the first quarter, according to the new data. That figure grew 3.3% annualized in the fourth quarter, and the last estimate showed it growing 3.1% in the beginning of the year, which was the second strongest quarter for personal consumption since 2010.


The new estimate shows the weakest personal consumption since the end of 2009, just after the recession ended.


The biggest fall was in investment by private companies — like buying equipment and building structures. Overall private investment fell at an 11.7% annualized rate, the worst quarter since the second quarter of 2009.


This large of a contraction is very rare outside of a recession, and raising the question from the last estimate of GDP again: If the economy is shrinking so severely, why isn't it being seen in the labor market? While unemployment is what's known as a "lagging indicator" — a datapoint that tracks the overall economy with a delay — it remained steady over the first three months of the year and then fell substantially to 6.3% in April, where it also stayed in May.


Furthermore, while job creation was relatively slow in January, with only 144,000 new jobs added to the economy, the subsequent two months were relatively strong with 220,000 and 203,000 jobs created respectively. That strong job growth continued into April and May, where preliminary data shows 282,000 and 217,000 jobs created respectively.




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