Revised GDP Figures Are Not Good News for the Economy

Thursday, 27 Jun 2013 01:02 PM

By Michael Kling

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The revised gross domestic product (GDP) figures are bad news for the economy, according to Slate.

The Commerce Department initially estimated that real GDP increased 2.4 percent in the first quarter.

Turns out it was really only 1.8 percent.

Video:
Economist Predicts 'Unthinkable' for 2013

The Commerce Department also downgraded nominal GDP growth from 3.6 percent to 3.1 percent.

While the initial numbers were far from energetic, the revised figures are even worse.

The size of the downward revision took economists off guard. "This was certainly unexpected and, I believe, rare," Jennifer Lee, senior economist with BMO Capital Markets, told CNNMoney.

Revisions to exports, commercial real estate, and especially consumer spending primarily accounted for the weaker numbers, according to CNNMoney.

The Commerce Department revised consumer spending, which represents about two-thirds of GDP, downward from 3.4 percent to 2.6 percent.

Cuts to government spending, which declined at an 8.7 percent annualized rate, were also a major factor, according to many economists.

The drop in consumer spending was partly due to lower spending on healthcare, UBS economist Drew Matus told USA Today. About 40 percent of healthcare is paid for by Medicare or Medicaid.

Spending in areas such as travel and legal services was also revised downward, said Moody's Analytics economist Scott Hoyt.

"I don't view this as particularly negative for the outlook," Hoyt said, saying consumers can continue spending. "The way the government measures it, spending on healthcare is consumer spending no matter who pays for it."

Moody's Analytics forecasts that the economy will grow 1.7 percent in the second quarter and accelerate to a 3 percent annual growth rate by the fourth quarter.

The weaker GDP figures soothed fears about the Federal Reserve ending its monthly bond purchases and helped stabilize the bond market, prompting Treasuries to rally.

"Finally ... we saw some stability back in the market. We’re in a much more stable position today," Kevin Giddis, head of fixed income at Raymond James, told MarketWatch.

Investors withdrew a $617 billion from bond mutual funds and exchange-traded funds in the first few weeks of June, MarketWatch reported, citing data from TrimTabs Investment Research.

"It doesn't take anything back that [Fed Chairman Ben] Bernanke said last week, but it helps soothe the turmoil in the bond markets despite the fact that equity markets are advancing,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co., told MarketWatch.

Video: Economist Predicts 'Unthinkable' for 2013

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