Investors were a bit rattled this week when the government released its third and final estimate of first quarter 2014 Gross Domestic Product, or GDP. A nation’s GDP is the measure all economic activity within its borders during a given time frame, which means it’s our nation’s “report card” indicating how well we are all doing economically.
The revision indicated our economy contracted by an alarming 2.9 percent annual rate in the first quarter. This revised number represented a substantial increase in the rate of contraction over the previous estimate, which indicated the economy shrank by 1 percent.
The concern regarding a contractionary GDP number is it could be a sign the U.S. economy is entering a period of recession. In fact, the technical definition of recession is two consecutive quarters of negative GDP growth, so in effect the first quarter has actually laid the foundation for a technical recession, which won’t be officially “proclaimed” until after second quarter GDP numbers are released in late July.
Interestingly, soon after the collective gasp at the terrible first quarter revision, the stock market shrugged off the news and managed to finish higher for the day. So why would investors so quickly digest and disregard this negative number?
The quick and easy answer is the weather. It is largely accepted the extreme winter weather experienced over much of the nation during the first three months of the year did much to derail and suppress economic activity in the U.S.
Long periods of cold and heavy snow bring construction projects to a halt, make transportation of goods difficult and cause us all to hole up at home, which impacts retail and restaurant sales. Having survived the polar vortex here in the Midwest, none of us need to be convinced the weather caused a lot of havoc earlier this year.
I think, however, other reasons investors quickly essentially ignored the negative GDP revision is because it just doesn’t feel like we are in a recession. While recessions are very difficult to predict, they do tend to be accompanied by other indicators, few of which are currently appearing.
At the front end of a recession we would expect the stock market to get more volatile; right now volatility is extremely low. We would expect job losses to appear; right now the economy is creating more than 200,000 jobs per month. We would expect consumer confidence to falter; right now consumer confidence is at a multiyear high. And, anecdotally, try to get a painter or a contractor to come out to your house for some summer projects right now – good luck with that, everyone is booked solid.
I will admit, this negative GDP number did get my attention. Like the stock market, however, after a few minutes of dwelling on the details I decided to file the number away as an event driven enigma and move on to things more current.