We reported recently that both the IMF and the US Federal Reserve had shaved their growth forecasts for the US economy in 2014 as a result of an unusually harsh winter. Initial estimates for growth in Q1 2014 came in at a contraction of 1%, but as further data has been obtained, this value has had to be revised down sharply. Revised figures from the US department of Commerce indicate that the contraction was nearly three times worse than the initial figures suggested with the actual contraction coming in at 2.9%. The discrepancy between the second and third estimates for Q1 GDP is the largest on record.
Weaker than predicted spending on healthcare was blamed for the over-estimate. It had been thought that consumer spending had increased by 3.1% in Q1, but once fuller data was available, this figure was revised downwards to an expansion of just 1%. Consumer spending accounts for about 70% of US economic activity. The trade figure was also worse than thought coming in at a drop of 8.9% rather than the 6% fall previously anticipated. The contraction seen in the US economy was the worst quarterly performance seen for five years. It is in stark contrast to the growth of 2.6% seen in the final quarter of 2013.
Whilst the revised figure is significantly lower than originally thought, it is unlikely that it will derail the Federal Reserve’s plans to “Taper” asset purchases. This is because it is widely expected that the economy will have bounced back to growth when initial estimates for Q2 growth, so Q1 will be looked upon as an aberration caused by the extreme weather. Recent data for unemployment and growth in manufacturing and the service sectors are feeding this optimism. Some analysts are predicting that Q2 growth will come in at around the 4% mark.