by Zach Bethune, Thomas Cooley and Peter Rupert
The BEA announced in the advance estimate last month that real GDP increased at a s.a.a.r. of 0.1% for 2014 Q1…and the second estimate released this morning revised that down to -1.0%. Is this just a pregnant pause or are we in danger of sinking into another contraction? A close look at the details suggest that more likely than not it is just a pause. Much of the decline was due to a large downward revision to estimates of inventory accumulation in the first quarter. Inventory accumulation has been a source of strength for the past couple of quarters and the decline of inventories in the first quarter is the counterpart to that. The revisions to most of the other components of GDP were relatively minor.
Consumption was essentially unchanged compared to the first estimate. Investment in equipment showed a smaller decline than in the first report and investment in intellectual property increased significantly in this revision. Investment in non-residential structures was revised downward significantly .
The interesting question is what does all of this mean for the progress of the recovery? It is a dismal set of revisions compared to what was already a dismal estimate of first quarter progress. Is the economy going to be in a prolonged pause or pull itself out? The only positive indication from this revision is that with inventories reduced firms will not have a big hangover of inventories that could hold back production in the second quarter. Many forecasters at the FED and elsewhere are looking for growth rates to climb back toward 3% in the coming quarters following two quarters of dismal growth. The second quarter GDP estimates (not due until July 30th) are going to be the first indicator we have of whether this is just wishful thinking or not.
On a more positive note, initial claims fell 27,000 to 300,000.