United States: A major first-quarter stumble, but future prospects remain undimmed

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United States: A major first-quarter stumble, but future prospects remain undimmed

United States: A major first-quarter stumble, but future prospects remain undimmed

Global Economic Outlook, Q3 2014

What might seem like a worrying dip in the United States’ GDP in Q1 2014 likely reflects only transient factors that will dissipate as employment picks up, enabling consumers to increase spending.

GEO_Q314_US_spot

For the second time during this recovery, US GDP goes negative. Time to worry? No.

Although an economic contraction is never a positive event, when it is caused by factors unlikely to carry over into future quarters, concern over the health and direction of the economy rightly remains muted. This was the case with the economic performance of the US economy in the first quarter of this year. Therefore, with the economy poised to pick up the pace of growth, it is worth looking at how the drivers of the largest component of the economy, US consumers, will be spending their money.

What happened in the first quarter?

The US economy shrank by 2.9 percent in the first quarter, as a 0.7 percentage point contribution from personal consumption was more than offset by huge subtractions from reductions in business inventory accumulation (–1.7 percentage points) and declines in exports (–1.3 percentage points). All of the other categories also subtracted from growth, albeit by lesser amounts (figure 1).

US Figure 1

The slowdown in inventory accumulation was expected at some point after the large increase that propped up the third quarter of last year, when inventories contributed 1.7 percentage points to that quarter’s growth.

Although it is not possible to quantify the extent of its impact, there is little doubt that all of the GDP categories were affected by the extremely harsh winter experienced by most of the country. As measured by the deviation in heating degree days from its average for the same quarter over the previous five years, the first quarter of 2014 was the third-coldest quarter in the last 60 years. In addition, the country experienced an unusually high number of separate snowstorms.1 Frozen ground and snarled airports and highways delayed or canceled many types of business activity.

The impact of the extreme cold is evident even in the one sector that had a positive impact on GDP—personal consumption expenditures. The growth in personal consumption is more than accounted for by growth in a single category: housing and utilities, which contributed 0.8 percentage points, reflect the increased need for home heating. Also, two categories of personal consumption that are fairly consistent contributors to growth, recreation services and food and accommodations, both turned negative as bad weather kept people home.

The source of the decline in GDP was largely attributable to reduced inventory accumulation and a decline in exports, so final domestic demand actually stayed positive in the first quarter. Figure 2 shows a comparison of GDP with final sales to domestic purchasers. GDP is a production concept: It is the aggregation of the output of goods and services produced by labor and property located in the United States. Final sales to domestic purchasers is a demand concept: It captures the demand for goods and services by consumers, businesses, and the government residing within the United States. It is calculated by excluding changes in business inventories and exports and adding in imports. For Q1, removing the negative impact of trade (gross domestic purchases) reduces the decline to –1.4 percent, and additionally removing the decline in inventory accumulation (final sales to domestic purchasers) pushes the growth rate to a positive, albeit small, 0.3 percent.

US Figure 2

With employment on the rise, consumer spending should be getting a much needed boost, which is needed to move to higher levels of GDP growth going forward.

How consumers allocate their spending

The United States hit an important milestone in May 2014—employment finally surpassed its pre-recession peak. The fact that it took one month short of five years since the end of the recession in June 2009 to regain this level is indicative of the very slow pace of this recovery. Fortunately, the pace of employment growth appears to have picked up. The average monthly employment gain over the first five months of 2014 was 214,000. The average gain in 2013 was 194,000.

With employment on the rise, consumer spending should be getting a much needed boost, which is needed to move to higher levels of GDP growth going forward. As shown in figure 3, personal consumption expenditures have accounted for a growing proportion of GDP over time, rising from 60.2 percent in 1970 to 68.5 percent in 2013.

US Figure 3

Not only has the proportion of GDP accounted for by personal consumption expenditures risen, the distribution of the types of consumption have also changed (see table 1). As recently as 1970, personal consumption was almost evenly split between goods and services. By 2013, the split had shifted closer to one-third goods and two-thirds services. Part of the reason for the shift is that overall prices for services have risen faster than prices for goods.

Table 1. Personal consumption expenditure by type as a percent of total personal consumption

1970 1980 1990 2000 2008 2013
Goods 49.2% 45.6% 39.0% 36.1% 33.7% 33.8%
Durable goods 13.9% 12.9% 13.0% 13.4% 11.0% 11.0%
Motor vehicles and parts 5.3% 4.8% 5.4% 5.3% 3.4% 3.7%
Furnishings and durable household equipment 4.4% 3.9% 3.2% 3.1% 2.7% 2.5%
Recreational goods and vehicles 2.8% 2.7% 2.8% 3.4% 3.3% 3.0%
Other durable goods 1.5% 1.6% 1.7% 1.6% 1.6% 1.8%
Nondurable goods 35.3% 32.7% 26.0% 22.6% 22.7% 22.8%
Food and beverages purchased for off-premises consumption 16.0% 13.6% 10.2% 7.9% 7.7% 7.7%
Clothing and footwear 7.0% 5.9% 5.1% 4.1% 3.2% 3.2%
Gasoline and other energy goods 4.1% 5.8% 3.2% 2.7% 3.9% 3.6%
Other nondurable goods 8.3% 7.4% 7.4% 7.9% 7.9% 8.4%
Services 50.8% 54.4% 61.0% 63.9% 66.3% 66.2%
Household consumption expenditures (for services) 49.2% 52.7% 59.0% 61.6% 63.4% 63.7%
Housing and utilities 16.9% 17.8% 18.2% 17.6% 18.4% 18.1%
Health care 7.4% 9.8% 13.2% 13.5% 15.6% 16.7%
Transportation services 3.1% 3.2% 3.3% 3.9% 3.1% 2.8%
Recreation services 2.2% 2.3% 3.2% 3.7% 3.8% 3.7%
Food services and accommodations 6.4% 6.9% 6.9% 6.0% 6.1% 6.4%
Financial services and insurance 4.8% 5.4% 6.5% 8.3% 7.7% 7.4%
Other services 8.4% 7.2% 7.8% 8.5% 8.7% 8.6%

Source: US Bureau of Economic Analysis.

With the transient causes of the first-quarter decline now behind us and employment increases providing a much-needed sign of growth and source of spending, the United States should experience positive growth over the remainder of the year.

Within the goods segment, the proportion of expenditures going to durables (items expected to last at least three years) held constant from 1980 to 2005 (not shown in table) at around 13 percent of total consumption expenditures. The recession and its aftermath reduced spending in this category to 11 percent. The proportion of spending on motor vehicles and parts have recovered somewhat from the recession lows, but growth due to post-recession price increases is being offset by people keeping their cars longer. According to a recent study published by the Bureau of Labor Statistics, “The average age of households’ cars, vans, sport utility vehicles (SUVs), and trucks increased from 10.1 years in 2007 to just over 11.3 years in 2012.”2

The decline in the proportion of consumption goods represented by nondurables was much more pronounced, with consumption in this category falling from 35.3 percent to 22.8 percent between 1970 and 2013. However, expenditures on nondurables have remained relatively constant since the late 1990s.

The biggest change in spending on services over the period has been relative spending on health care, which has more than doubled as a result of faster-than-average price increases and the increased consumption of health care services by an aging population. Although health care inflation has moderated recently, the continued aging of the population means that this component will continue to grow as a proportion of consumer spending.

With the transient causes of the first-quarter decline now behind us and employment increases providing a much-needed sign of growth and source of spending, the United States should experience positive growth over the remainder of the year, although the pattern of growth will be different from what was originally thought. The second quarter’s growth should be fairly robust if it benefits from a bump up from activity deferred from the first quarter. The prospects for the remainder of the year remain solid.

Endnotes

View all endnotes
  1. Jason Furman, Chair of the Council of Economic Advisors, blog, “Second Estimate of GDP for the First Quarter 2014,” May 29, 2014, http://www.whitehouse.gov/blog/2014/05/29/second-estimate-gdp-first-quarter-2014.
  2. Ryan Pfirrmann-Powell, “ Americans’ aging autos,” US Bureau of Labor Statistics, May 2014, http://www.bls.gov/opub/btn/volume-3/pdf/americans-aging-autos.pdf.

About The Author

Dr. Patricia Buckley

Dr. Patricia Buckley is director of Economic Policy and Analysis at Deloitte Research, Deloitte Services LP.

United States: A major first-quarter stumble, but future prospects remain undimmed
Cover Image by Jessica McCourt (Cover), Maria Corte Maidagan (United States)