Economy

Why the GDP Drop Is Good for the U.S. Economic Outlook


The U.S. economy shrank at a 1 percent annual rate in the first quarter, but the red ink isn’t nearly as scary as it looks. In fact, the downward blip sets the U.S. up for strong growth in the current quarter covering April to June. “As far as terrible reports go, GDP wasn’t too bad,” reads the headline on the report today by Michael Feroli, chief U.S. economist of JPMorgan Chase (JPM).

Most of the decline in gross domestic product occurred because companies slowed the pace of inventory accumulation, according to data released on Thursday by the Bureau of Economic Analysis. In other words, output slowed because they weren’t producing as much stuff to go on shelves. Now companies have an incentive to speed up production to rebuild those inventories.

“The economy is in the process of reaccelerating,” David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates (GS:CN), wrote to clients. He said his firm’s model of the economy “suggests near-0% odds of recession for the coming year.”

Another not-to-be-repeated drag on the economy in the first quarter was poor weather. Investment in structures fell at a 7.5 percent rate, partly because construction workers couldn’t work effectively in the unusually excessive cold and snow. Adding to growth was health-care spending, which, boosted by the Affordable Care Act, grew at a 9.1 percent pace.

There were some not-so-good figures in the report. Corporate profits fell at a 9.8 percent annual rate, the biggest decline since the 2007-09 recession. “Our guess is profits rebound in Q2,” Steve Blitz of ITG Investment Research (ITG) wrote to clients.

IHS Global Insight (IHS) forecast that GDP would grow about 3.5 percent this quarter, while Blitz predicted “3%+.” JPMorgan Chase kept its second-quarter estimate at 3 percent.

Lindsey Piezga, chief economist at Sterne Agee, drew more pessimistic conclusions for the report. She wrote that unless business spending picks up, “the economy is going to not only fall well short of some of the more optimistic expectations for 3-4% GDP, but struggle to return to the average 1.5-2% pace of the past few years.”

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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