YIKES! We just got the third revision to Q1 GDP, and it was horrible. After an initial estimate showing a mere 0.1% gain in growth in the first quarter, the government now says the economy shrunk at a staggering 2.9% pace, making it the worst quarter Q1 2009, at the pit of the financial crisis.
So should you worry?
Here’s a bunch of reasons why.
First, this is old, old data. It’s almost July, and we’re talking about data that goes from January through March. And as we know, the weather was horrendous in that quarter.
Second, healthcare spending had a huge impact. Ian Shepherdson of Pantheon Economics explained: Two thirds of the revision is in consumption, cut to +1.0% from +3.1%… Almost of all this huge hit is in the healthcare services component, cut to -1.4% from +9.1%.” Given that this was the quarter of the Obamacare rollout, it’s likely that the numbers are wonky.
Most importantly, this data isn’t consistent with anything else in the economy. Neal Dutta of Renaissance Macro tells it like it is in a note titled GDP = USELESS:
If GDP were truly so weak, we would not expect aggregate hours worked to climb 3.7% annualized through May, jobless claims to remain near cycle lows, consumer confidence to hit a cycle high, industrial production to climb 5.0% at an annual rate over the first five months of the year, core capital goods orders to be up 5.8%, ISM to be above 55, and vehicle sales to hit their strongest annualized selling pace for the year. GDP is the outlier in these data points. I will roll my eyes and move on. Most of the data we just mentioned is consistent with underlying growth over 3.0%.
This is really what’s key. Not only is the current data strong, but most of the data for Q1 (including job creation) was fine. If that 2.9% number really reflected a major collapse in the economy, we wouldn’t have had in-line job creation numbers in January, February, and March.
Finally, things are looking better than have in a long time. Since Q1, the data has been MUCH stronger, with indicators of accelerating credit creation, wages, prices, and industrial output. There’s a lot of data that covers this, but rather than going through all that, we just wanted to highlight one chart which probably most people haven’t seen, but which says something big about the state of the recovery. Yesterday Consumer Confidence came in at its highest level in a long time, but Wells Fargo pulled out this fascinating nugget from the survey. We’re finally at the point where more consumers are saying they see the economy as being good, as opposed to bad.
This isn’t about Wall Street or the stock market. This is a real pivotal point in terms of the general outlook. People are feeling the recovery. And that’s not something you would expect to see if things were collapsing.
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