Despite Huge Drop in GDP, Economists Still See Better Days. Really?

When it was reported that the economy shrank nearly 3% in the first quarter, most economists -- the same ones who were completely caught off guard by the downward revised 3% number -- seem
 to think its still on track to be positive; claiming that the first quarter was a one-off anomaly due to weather, lower healthcare spending, and a decline in exports. 

The problem with this thinking is that, just one day after the dismal first quarter GDP was announced, another disappointing number, consumer spending, signaled even more trouble in the 2nd quarter.  In May, the second month of the 2nd quarter, consumer spending came in at half of what those same economists were predicting, at an abysmal 0.2% percent growth.  This after, April had literally shown no growth.  Since consumer spending makes up 70% of the calculated GDP number, its hard to believe that the 2nd quarter GDP will be anything but lackluster or, worst case, another negative number; thus, signalling a recession.  If that happens, the weather can't be blamed for the lack of consumers being holed-up in their homes, not buying products or seeing their doctors.

Unless spending comes in like gang busters in June, this economy is showing the clear signs that the consumer has reached a tipping point and incomes have not kept up with inflation.  As a result, people may be putting off buying big ticket items, spending less on leisure, entertainment, other discretionary items, or even seeing their doctors less regularly because they are simply so cash-strapped that they can't afford to pay the deductibles.  As history has proven time and time again, the lack of consumer spending is a primary reasons for recession.

Therefore, should anyone believe all those "happy times" economists who now seem to think that the first quarter was just a fluke?

References:

Economists brush off dire GDP: ‘This is a blip’: http://thehill.com/policy/finance/210563-economists-brush-off-dire-gdp-this-is-a-blip

Consumer Spending in May Was Disappointingly Weak: http://abcnews.go.com/Business/wireStory/consumer-spending-02-percent-24313555

What is Economic Recession? - Definition, Causes & Effects: http://education-portal.com/academy/lesson/what-is-economic-recession-definition-causes-effects.html#lesson

Cutting Through The Fog: The Economy Shrinks By 2.9%: Recession Is Now A Statistical Possibility: http://cuttingthroughthefog.blogspot.com/2014/06/the-economy-shinks-by-29-recession-is.html

The Economy Shrinks By 2.9%: Recession Is Now A Statistical Possibility

Yesterday, the Bureau of Economic Analysis announced a shocking contraction of the economy -- as measured by Gross Domestic Product (GDP).  In this latest revision, the economy "shrank" at an annualized rate of 2.9%.  This was the third revision of the first quarter economic activity that was originally predicted to "grow" by 2.5%.

Never in the history of the U.S. has a contraction this large been outside the realm of a full-blown economic recession.  So, it is hard to believe that the second quarter of this year will snap back enough -- growing by at least 3% -- to avoid putting us into the technical definition of recession: Two consecutive quarters of economic contraction.

In this blog, I have predicted that ObamaCare would push us into recession in 2014.  I have also noted that retailers are signalling economic woes for 2014.  And, now, we have some additional evidence that the consumer might have to further pull back on any discretionary spending that would otherwise drive the economy.  In May, consumer prices grew at the highest rate in 15 months at 0.4%.  This despite the fact that wages are stagnant.  More importantly, essential consumables were up even higher.  Electricity rates were up 2.3% in May. Food was up 1/2 of a percent.  And, if the drought continues in the Southwest, food prices will continue to soar.  Further, Obama's crackdown on coal will force electricity providers to further raise rates in order to be compliant with his latest EPA mandates.

The bottom line is that Obama's constant meddling in the economy is now rearing its ugly head in what could be a potential recession.  Things like forcing employers to pay overtime for salaried workers only results in higher costs to consumers and, consequently, consumer's wallets shrink and they can't spend as much on the discretionary items that would otherwise drive our economy.  When someone has to pay more for something they need to live such as electricity, other optional things, like dining out, are cut and the economy starts to contract.

Right now, I just can't see the country avoiding another recession.

References:

U.S. Economy Shrinks by Most in Five Years: Final Revision for 1st-Quarter GDP Shows 2.9% Contraction: http://online.wsj.com/articles/u-s-gdp-contracted-at-2-9-pace-in-first-quarter-1403699600

GDP Disaster: Final Q1 GDP Crashes To -2.9%, Lowest Since 2009, Far Below The Worst Expectations: http://www.zerohedge.com/news/2014-06-25/gdp-disaster-final-q1-gdp-crashes-29-worst-2009-far-below-worst-expectations

Cutting Through The Fog:  Will ObamaCare Push Us Into Another Recession In 2014?: http://cuttingthroughthefog.blogspot.com/2014/01/will-obamacare-push-us-into-another.html

Cutting Through The Fog: Retailers Are Signalling Economic Woes For 2014: http://cuttingthroughthefog.blogspot.com/2014/05/retailers-are-signalling-economic-woes.html

Consumer prices rise sharply in May: http://www.usatoday.com/story/money/business/2014/06/17/consumer-prices-may/10642375/

Weak Wages Pose Threat to Liftoff for Economy: http://online.wsj.com/articles/consumer-spending-fell-0-1-in-april-1401453354

Obama to order businesses to hike overtime pay for salary workers: http://www.washingtontimes.com/news/2014/mar/12/obama-order-businesses-hike-overtime-pay-salary-wo/

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