Last month, the Bureau of Economic Analysis (BEA) revised down its first quarter 2014 Gross Domestic Product (GDP) estimates. GDP measures the total value of all goods and services produced in the economy during a given period, and is one of the broadest indicators of economic activity. According to BEA, the U.S. economy shrank 2.9 percent in the first three months of the year.
Since then, economic journalists like Andrew Flower and Ben Casselman at FiveThirtyEight.com have written extensively about the GDP estimates and the contraction’s potential impact. The question is: how much weight should we put in a single quarter of negative GDP change? The opinion among journalists, economists and financial experts is mixed. While there are few people willing to assert that the “sky is falling”, the news is certainly unwelcome considering the multi-year sluggishness of the recovery.
The Pessimistic Assessment:
First, let’s state the obvious; an expanding economy is better than a contracting one. While GDP is not a flawless measure of national economic health, it does correlate with increases in consumer spending, business investment and individual wealth. What makes this downward revision particularly alarming is the size of the contraction. The original estimate had GDP down 1 percent then, in June, the BEA moved it even further to negative 2.9 percent.
“Negative quarters are rare outside of recessions,” explains Casselman. “There have been only two other non-recessionary quarters since World War II when the economy shrank at a rate over 2 percent.” In both of those cases, the negative quarters immediately preceded a recession.
The following chart shows how the fall in GDP last quarter compares to recent history. The decrease is the largest of any outside of the recession. However, it is worth noting that GDP fell over 1 percent in the first quarter of 2011 and bounced back substantially thereafter.