FIVE FACTORS THAT EXPLAIN U.S. GROWTH / THE FINANCIAL TIMES COMMENT & ANALYSIS

April 30, 2014 6:30 pm

Five factors that explain US growth

By Robin Harding in Washington

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There are two reasonable responses to news of the US economy's dismal 0.1 per cent annualised growth in the first quarter of 2014: either panic, or else curse the vagaries of economic data, and wait for revisions to straighten out the rather jumbled numbers. Consumption came in stronger than expected, while investment and exports were dreadful, making it hard to tell a clear story about the state of the world's largest economy. Here are five takeaways:

(1) Last of the winter weather

First-quarter gross domestic product is the last release that covers a freezing US winter – all other data from January and February are ancient history now.

Almost every area of weakness could be chalked up to weather: goods consumption, up just 0.4 per cent at an annualised pace, because buyers stayed away from the shops; residential investment, down 5.7 per cent, because of delayed construction; and exports, down 7.6 per cent, because manufacturers could not ship via snow-clogged roads and railways.

More up-to-date data, such as non-farm payrolls, suggests the economy picked up in March and April.

(2) Watch out for revisions and a second quarter rebound


The first release of GDP is always prone to large revisions. This time, though, changes are especially likely. A lot of data are unavailable when the Bureau of Economic Analysis makes its first estimate, so the 0.1 per cent number will be using a lot of figures from January and February, which were hardest hit by the weather, with more numbers from March – which was less affected – still to arrive.

Even if revisions do not move the numbers up, there is likely to be a rebound in the second quarter, as some weather-affected activity was delayed but not lost. Morgan Stanley's tracking estimate for the second quarter is annualised growth of 3.5 per cent.

(3) The Affordable Care Act rescued the numbers

It says nothing about the merits of President Barack Obama's healthcare reform, but if the ACA had not existed, then GDP would have fallen. Healthcare spending contributed a massive 1.1 percentage points to growth, so without it, the headline GDP figure would have been minus 1 per cent.

In the national accounts, expansion of the Medicaid healthcare programme for the poor and subsidies for people buying health insurance count as social benefits, and thus boost personal incomes. When people actually consume health insurance or medical services it counts as consumption and shows up in the main expenditure-based version of GDP.

(4) . . . but that spending may yet be revised away too

The BEA does not actually know yet how much newly insured people are spending on medical care. This is yet another estimate. What the BEA says is: "For preliminary estimates made before the final source data are available, BEA will take account of available information on Medicaid benefits, ACA insurance exchange enrolments, and other related information."

This suggests the BEA'S estimates of healthcare consumption are heavily influenced by the number of sign-ups on insurance exchanges and theoretical expansions in Medicaid coverage. If actual spending does not match the uncertain estimates, this bit of GDP could be revised down.


(5) It is right to worry, at least a little


All the volatility in the numbers makes it hard to take a clear signal, but all the same, there are reasons to worry in this release. The US Federal Reserve's economic scenario for 2014 involves an acceleration in growth. Housing and business investment are the components of GDP most likely to bring that.

It is bad news, therefore, to have business investment off by 5.5 per cent at an annualised pace and housing investment down by 5.7 per cent. Even with the hit from the weather, this is more consistent with another year of mediocre 2 per cent growth, than the forecast acceleration towards 3 per cent.