Economic Watch: GDP Posts Biggest Drop Since Great Recession
June 25, 2014
UPDATED -- The U.S. economy shrank at its steepest rate in the first quarter of the year since first quarter of 2009, amid the Great Recession, according to a new estimate from the Commerce Department.
The 2.9% annual decline in the gross domestic product compares to an estimated drop of 1% a month ago, but the setback is believed to be only temporary with reports of hearty economic growth in the current quarter following a harsh winter.
Much of the downward revision reflected a drop in healthcare spending along with a larger trade deficit that previously estimated.
This most recent number in this measurement of the nation's total output of goods and services follows the GDP posting an annual growth rate of 2.6% in the final quarter of 2014.
Many analysts see this downturn as short lived, pointing to the winter weather that slowed commerce and point to figures in the current quarter that indicate the economy is performing better.
"The revision to first-quarter GDP was sizable, to say the least, suggesting activity had not just halted at the start of the year but plunged over an enormous cliff, hitting each rocky edge on the way down," said Lindsey Piegza, chief economist at the investment firm Sterne Agee. "Clearly the economy now must attempt to dig itself out from an even larger hole than previously expected, making the relative rebound in February and March, if you can call that a rebound, appear that much more lackluster in comparison."
From the Federal Reserve's standpoint, this morning's disappointment further justifies tits recent decision to maintain their accommodative stance, and furthermore, downgrade their near-term outlook for growth, she said.
"Recall at the June meeting; the Fed lowered its growth forecast from 2.8% to 3.0% to 2.1% to 2.3% for 2014. Although, given the near 3% decline at the start of the year, the economy would have to rebound at a near 4% GDP pace for the remaining three quarters in order to reach even the Fed's new, lowered growth outlook," Piegza said. "In other words, the Fed's forecast is likely to overshoot (again) a more lackluster reality, a realization that will continue to keep the Fed on hold. After all, the dot-plot showing heightened expectations for a near-term rate hike is based on the Fed's overly optimistic longer-term growth forecasts, while monetary policy is based on a more sobering reality."
Meantime, a separate report shows continue strength when it comes to shipments and new orders for manufactured durable goods.
According to the U.S. Commerce Department shipments posted their fourth consecutive gain in May, adding 0.3% from the month before, hitting its highest level on record going back to 1992.
In contrast new orders for manufactured durable goods fell 1% during the same time, following an April gain of 0.8%, which was the third consecutive monthly hike. Transportation orders fell 3% following three monthly increases. Excluding transportation, new orders increased in April by 0.1%. When defense orders are excluded the increase is 0.6%.
Update adds Lindsey Piegza analysis.