US real GDP decreased at an annual rate of 2.9 percent in Q1 2014, the fastest rate in 5 years, according to the latest revisions from the Bureau of Economic Analysis

1. Economics for your Classroom from
Ed Dolan’s Econ Blog
Revisions Show Biggest
Quarterly Drop in US GDP
in Five Years
Posted June 27, 2014
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2. June 27, 2014 Ed Dolan’s Econ Blog
US GDP Falls in Q1 2014
 The third estimate from the Bureau
of Economic Analysis released on
June 27 showed that US real GDP
fell at an annual rate of 2.9 percent
in Q1 2014
 In May, the second estimate May
had shown a decrease of 1 percent
 Harsh winter weather undoubtedly
contributed to the downturn, as did
technical revisions to the way health
care expenditures were measured

3. Phases of the Business Cycle
 According to standard terminology, the
recession phase of the business cycle
is the downward movement of GDP
from its previous peak
 It is common to refer to the first phase of
growth following the trough (low point)
of the recession as a recovery. During
that phase, idle equipment goes back
on line and workers return to their jobs.
 Official reports call the entire growth
phase of the cycle an expansion, but
many writers apply that term only after
GDP has reached its previous peak.
 The latest data show that the expansion
has stalled, although growth is expected
to resume in the second quarter
June 27, 2014 Ed Dolan’s Econ Blog

4. Sources of Growth by Sector
 Most of the downward revision was due to
slower growth of consumption than
previously estimated. A technical change in
estimates of healthcare spending
accounted for much of the slowdown
 Most of the actual decrease in GDP was
due to a decline in investment, especially a
sharp drop in inventories
 A decrease in expenditures of state and
local government was only partly offset by
an increase in Federal expenditures
 Net exports, which had been a strong point
of the recovery, were negative by an even
greater margin than previously estimated
Contribution by sector to the
-2.9% GDP growth in Q1 2014
Note: Imports are recorded in the national
accounts with a negative sign, so the -.27
percentage points shown here represent an
increase in imports
June 27, 2014 Ed Dolan’s Econ Blog

5. Export Growth Plunges
 Exports have played a leading role in
GDP growth during much of the
recovery
 Beginning in Q2 2012, the growth of
exports slowed, but then recovered
again in the last three quarters of 2013
 In Q1 2014, exports took a dive, turning
in by far their worst performance since
the depths of the recession
June 27, 2014 Ed Dolan’s Econ Blog

6. State and Local Spending Turns Negative Again
 Decreasing government spending
has been a negative influence on
GDP growth for most of the past 3
years
 In mid-2013, state and local
government spending showed the
first convincing growth for four years,
more than offsetting the continued
decrease in federal spending
 In Q1 2014, the situation reversed,
with S&L spending making a negative
contribution that more than offset a
tiny increase in federal government
spending
June 27, 2014 Ed Dolan’s Econ Blog

7. Corporate Profits Drop Sharply
 For most of the past two years,
corporate profits have been running
at or near record-high levels
 Profits before tax fell 9.1 percent in
Q1 2014 and profits after tax by 8.7
percent
 Despite the sharp drop, corporate
profits after tax remained above the
peak reached during the boom that
preceded the Great Recession
June 27, 2014 Ed Dolan’s Econ Blog

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