Pretty much everyone was stunned to see Q1 GDP growth slashed to -2.9% from an earlier estimate of -1.0%.
The revision largely boils down to one thing: healthcare spending.
“Two thirds of the revision is in consumption, cut to +1.0% from +3.1%,” said Pantheon Macroeconomics Ian Shepherdson. “Almost of all this huge hit is in the healthcare services component, cut to -1.4% from +9.1%.”
According to the BEA, healthcare spending went from adding 1.01 percentage points to subtracting 0.16 from the headline GDP growth number.
“So much for the BEA’s initial view that the start of Obamacare triggered a surge in spending on healthcare,” said Shepherdon. “The press release offers no detail on what triggered this massive revision.”
We’ll surely hear more about that.
Also, while healthcare was responsible for the bulk of the revision, it wasn’t responsible for all of it.
“Net trade also contributed, taking 1.5 percentage points off growth compared with 1.0 percentage points previously,” said Capital Economics’ Paul Dales.
Most economists and strategists are brushing this off. First of all, it reflects activity from Q1, which ended in March. Second, the bulk of the more recent data has been positive.
“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,” said Renaissance Macro’s Neil Dutta. “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%.”