Fri, 27 Jun 2014
Given the dramatic downward revision in first-quarter GDP this week, it will be mathematically difficult to hit 2% growth for the full year, but more revisions may be coming, says Morningstar's Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.
I'm here today with Bob Johnson, our director of economic analysis. We're going to ask if it's possible for the economy to grow 2% in 2014, after some disappointing data we've seen recently.
Bob, thanks for joining me today.
Bob Johnson: Great to be here today.
Glaser: Before we tackle that question of what the rest of the growth is going to look like for the year, let's look back at the first quarter. The final revision of GDP showed a 2.9% decline--a pretty sharp decline in output. What's happening there? Why was this revised down so much?
Johnson: It was a very large decline, and it's the largest one of the recovery so far. Certainly don't worry. I don't think it's going to upset the recovery. I don't think we are moving into a recession here, or that this is the beginning of the end. But it was a shockingly bad number, and it was largely because of a major revision in the health-care assumptions made in the numbers.
The BEA is usually very good and plays everything very straight down the line, but with the Affordable Care Act, they made some very big assumptions about health care. As it turns out, they admitted very quickly that their assumptions were wrong, and they had to go back. Instead of health care being a major contributor to the economy in the first quarter, it turned out to be an absolutely massive detractor from the economy. So that's the big reason for this large revision. Before, they had made manual entry and said, we know people are signing up for insurance, and that means surely they went out and used that insurance. But lo and behold, they didn't.
Glaser: What do you think is stopping people from using it? Is it that they didn't actually pay the premiums? Do they find it difficult to use? Is it the weather?
Johnson: I think weather played a little bit of it, but the bigger part of it is that more of the sign-ups and the actual payments probably came later in the quarter, as we got nearer to the deadline for signing up. So they couldn't necessarily go and use [that insurance] right away.
Even with the Affordable Care Act, the deductibles are still quite large. So some of the incentive isn't there to race out and do everyday health-maintenance type of things. It might not have caused the jump that people expected. And it may have taken a while for them to get their cards.
There are some signs that finally some of what they thought might have happened in January, February, March may have begun to happen in May and June a little bit, when we looked at the employment data that we've seen so far.
Glaser: Given these manual adjustments, do you think we're at the right number, where health-care spending really is?
Johnson: I have no clue. Health care has been a rock-steady arm of growth for the economy for some time, and now the numbers have just been incredibly volatile. I'm not 100% convinced that they are right yet. We didn't see the number of people working at hospitals and doctors' offices fall off a cliff in January, February, and March. So I really don't know what's happening. It's hard to say. My gut is that the numbers have kind of moved along on a more normal pace then what they are indicating, so I think there is yet another revision to these numbers coming at some point.
Glaser: Let's look at personal consumption now--a big part of GDP. What did consumption look like in May?
Johnson: Keep in mind we just got done talking about first-quarter data. So now everybody, the next day, turned to the consumption data for April and May. The first quarter is water under the bridge, so who cares? So let's look at the consumption in April and May.
And what a total disaster the numbers appeared to be on the surface! Both months showed decline--not very big, 0.1% and 0.2%. So not catastrophic. And given that we had a 0.6% growth rate in March, you have to put it all in context.
Yet having two down months in a row is a scary thing. I think there were a lot of artificial things there. Health care continued not to boom. It was a flat number. It wasn't a detractor, at least, but it was flat, and it's usually a growing category.
The other big thing that happened is utilities. Because of all the cold weather, we had huge usage over the winter months. Then finally in April and May, that all fell off. It turns out that the entire decline and then some in the consumption numbers was accounted for by a fall in utility bills. That's not a big deal for the economy, because that means we're actually using less natural resources, and utilities don't employ very many people, and the number of people they do employ doesn't change based on usage all that much. So, that's a great category to have down, in my mind.
The other big down category in May is a little scarier, … food at home. That number had a huge decline. The reason, I believe, was because prices went up so much, and there was sticker shock. We've talked about meat prices being up 7%, and we talked about the CPI a few weeks back. And people are walking in, seeing those prices, and instead of saying, I'm going to buy a week's worth of groceries or three weeks and throw a few steaks in for the following week, now people are going by the counter and saying, I need the hamburger tomorrow; that's what I'm buying. And I'll come in and buy the chicken the day after that because prices have gone up so much. That's what it looks like to me.
So, people are buying shorter term, and that's hurting the food number, which was down. It's kind of hard to believe that the food number is down. You've got to eat. So, it's just a matter of how much food consumer are stocking up on. And clearly, the worst category was meats, which have seen the biggest price increase, and the second was milk, where we've also seen some hefty increases.
Glaser: How about on the income side of the equation?
Johnson: Now we've got all the negative news behind us. We've got the really crummy first-quarter GDP number--mainly health care and inventory-type things going on. We had a pretty poor consumption number, but when you strip back a couple of factors, maybe not so scarier.
Now for the good news. Incomes actually did quite well, and we're in our fourth month in a row where incomes have either been up 0.2% or 0.3%, which averages into 2.4% or 3.6%. So, those are absolutely great numbers.
The savings rate for now has gone up, either because of weather or whatever. People haven't been able to spend all of their money, and we've had one of the higher savings rates that we've seen in some time. And I think they're probably going to spend it in the months ahead. We're already beginning to see that. The shopping center data this month finally spiked, and we finally saw one weekly number over 4% in terms of shopping center sales.
So, people are beginning to spend more in some of the conventional channels, which is great for the economy, and that indicates that the income is already beginning to go to work a little bit more than it has been.
Glaser: Will these incomes be enough to get us over that 2% hurdle to make up this big loss from the first quarter?
Johnson: The 2% you're referring to is the GDP growth forecast for the full year. I was probably the most conservative guy on the street with that 2% number, and even now that looks a little bit open to question. It's just mathematically really hard to get to 2% when you start out with a minus 2.9%. And it's not going to help that the second quarter growth is now going to be hurt by the consumption numbers that we've seen from April and May. Consumption is 70% of the GDP calculation, and with two down months in a row, only with a gift from inventories will we get to 2% or 3% growth in GDP in the second quarter. So we won't even maybe offset all that we lost in the first quarter, unfortunately, based on the numbers that we've seen so far.
I hope we're going to do better in the second half, but we're going to need a couple of quarters of 4% growth or more to get us to 2%. Realistically, we might be more like a 1.5%, but I'm going to wait and see if these numbers get revised yet one more time before I make that final dip. But the 2% now looks like a top, not a bottom.
Glaser: No need to panic, then, but growth could remain slow for quite some time?
Johnson: Like I've said, it's 2% to 2.5% growth as far as the eye can see.
Glaser: Bob, I appreciate your take on the data today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.