Was the Last GDP Number Really Wrong?
07/22/2014 12:01 am EST
There's been much debate about the weak 1st quarter GDP and MoneyShow's Jim Jubak wonders whether some of the assumption that went into this report may have been off target.
So last quarter we had GDP come in, official GDP come in after revisions showing a decline of 2.9%. What's happened since then, two different responses to that, one is basically people saying, well it was all weather related so it doesn't mean very much because of circumstances, that's one response. I think that's probably wrong because we've a lot of evidence since then that suggests that the weather effects of the cold temperatures in January and February didn't really have as big effect as people thought. When we see what sales are doing, we're not getting the big rebound we would get when weather changed if it was all about weather in January, February.
The other possibility is that a number is simply wrong, and Floyd Norris of the New York Times said a really good piece on that possibility on July 11. What he noted and this is not unique to Norris, is that most of the real drop in GDP came from a revision of estimates of health care spending, that after looking at a very modest increase in health care spending, it looked like health care spending actually went down in the quarter on further revision. It's important to note, as Norris does, that these are all estimates so we really don't know what it is and we don't know what the trend line is, that when the statisticians at the Bureau of Economic Analysis do this, they have to make assumptions about, well, if health care spending went down at this point it means that it's going to continue down, it means that places that we haven't measured show the same decline as the places we have measured. As Norris points out in a number of interviews, he's talked to a lot of economists who say there's something really whacky about this health care number, that we're looking at the first drop in health care spending quarter to quarter since the introduction of the big great society health care programs in the 1960s. Health care spending never goes down. The trend is always up. When people have a dollar, they put it into their own health, so that suggests that maybe what we're looking at here is a kind of lag.
The last time we had a big expansion in government programs for health care there was a lag in terms of when people were able to sign up and when people were able to spend, and when people decided that they would wait until insurance kicked in and then spend, so the possibility is that this number is really wrong. Ergo, that we should see again a pretty good rebound in second quarter GDP and third quarter GDP in the United States, not so much a rebound because the economy has gotten better, but because the statistics have gotten better. We really won't have solid statistics of this until the final revision of first quarter 2014 GDP comes out in 2018, so if you're waiting for that, good luck to you. The market will probably have moved on from now to then, but we will get I think some kind of better health care numbers in the second quarter and the third quarter, and I likelihood I think at this point is for one reason or another that we're going to see a rebound in GDP and economic growth. We get reports of that really not until August, but the question really is going to be the market is assuming that for all kinds of reasons, mostly for wealth related reasons, mostly because of optimism in general, market is assuming a rebound in second quarter GDP. The question is not going to be whether there is one, but whether it's more than people are expecting, more than is baked into the market with the Dow at $17,000.