Why GDP drop doesn't mean US is slipping into recession again

Revised figures for US GDP growth in the first quarter of 2014 show the economy actually shrank. But the trend line is still up, and experts don't think this points to new problems.

Patrick Semansky/AP
Jon Wyand works on a truck engine assembly line at Volvo Trucks' powertrain manufacturing facility in Hagerstown, Md. The Commerce Department revised its first-quarter gross domestic product data Thursday.

America’s gross domestic product declined in the first quarter at an annual rate of 1.0 percent – sharply lower than a month-ago estimate that showed essentially zero growth for the quarter.

The GDP number from the Commerce Department Thursday came in below forecasters’ consensus expectation for a decline of about 0.5 percent. But on Wall Street, investors aren’t viewing the dip as a signal of recession risk, and US stock indexes rose Thursday morning on other indicators that signal a current revival in growth.

Why did this happen? Business inventories declined more than the government had initially estimated. That accounts for most of the revision from zero growth for the quarter to an actual decline in GDP. The inventory issue comes atop particularly stormy and cold winter weather, which was already the main reason cited for the first-quarter sag.

But some economists say the slowdown isn’t just a matter of the weather and adjustments in the volatile arena of inventories. Home construction and business investment in things like new equipment also cooled, and US exports slowed down.

What does it mean? The good news is forecasters see the economy reviving to a growth pace above 2 percent as inventories rebound and as consumers and businesses break out of their winter doldrums. It also may be comforting to note that GDP has had a quarterly minus sign back in 2011, as well, and the recovery didn't go off the rails.

But bad weather or none, it’s not good to see economic growth sag so far from its expected trend line. To some economists, it’s a signal of concern about the momentum on several fronts. The housing market is in a slow patch, as potential buyers wrestle with affordability concerns and as many potential sellers are still “under water” – with mortgage balances bigger than their property values. Beyond that, Mark Vitner at Wells Fargo describes overall demand for goods and services as soft – “firmly on the slow growth track.”

What comes next? Forecasters generally expect steady if unexciting growth ahead, with calendar-year GDP growth a bit higher than 2 percent, followed by stronger growth next year (perhaps 3 percent or slightly higher). That’s based on expectations that the housing market won’t unravel, and that modest wage growth will help drive consumer demand.

Since the first quarter ended in March, indicators on the economy have been pretty solid. Job growth has picked up and on Thursday the Labor Department reported that claims for unemployment benefits fell in the latest week to their lowest level since 2007.

But with economies still tepid around the world, the Federal Reserve is likely to tread carefully as it prepares to back off from monetary stimulus policies. The European Central Bank appears poised to loosen monetary policy soon in a bid to help a stalled recovery there.

of stories this month > Get unlimited stories
You've read  of  free articles. Subscribe to continue.

Unlimited digital access $11/month.

Get unlimited Monitor journalism.