The U.S. economy probably contracted even more in the first quarter than currently estimated as spending on health-care services unexpectedly dropped, according to analysts at JPMorgan Chase & Co. and Pierpont Securities LLC.
Quarterly data on services issued today by the Census Bureau showed health-care outlays dropped at a 5.8 percent annualized rate from January through March compared with the government’s current estimate of a 9.7 percent gain, said Daniel Silver, a JPMorgan economist in New York, based on the bank’s own seasonal adjustment. The pullback means gross domestic product shrank at about a 1.6 percent pace in the first three months of the year, according to JPMorgan’s calculations.
The world’s largest economy contracted at a 1 percent rate in the first quarter, the first drop in three years, as companies added to inventories at a slower pace and curtailed investment, according to revised figures issued May 29. The numbers will be revised again on June 25 as more data, including the information on services issued today, become available.
Today’s report “should mean there’s a downward revision,” Silver said in an interview. The “first quarter is going to be weaker.”
Silver said JPMorgan analysts are less confident in their tracking estimate than usual because it is subject to further guidance from the Bureau of Economic Analysis, which is responsible for calculating GDP data. The effects of President Barack Obama’s signature health-law care are difficult to quantify and may mean the BEA decides to modify the way it interprets today’s survey data, he said.
A research note from Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, put his tracking estimate at minus 2 percent for the first quarter based on the new services data.
Stanley said the implications for second-quarter growth are also negative as the government will need to revisit its assumptions on how the Affordable Care Act is affecting consumer expenditures.
The economy will probably grow at a 2.9 percent pace in the second quarter, and today’s report biases “the potential results downward,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a research note. “In an environment of economic complacency, yet another downward revision to 1Q growth could cause enough of a psychological effect to move the markets, and evidence is mounting that the 2Q bounce will be much smaller than originally thought.”
Economists surveyed by Bloomberg this month projected GDP will grow at a 3.5 percent pace in the second quarter.
The implications for this quarter aren’t clear-cut, said Silver. The government tracks the health-care data based on a four-quarter moving average, so it’s important to take a longer-term view, he said. Because the Affordable Care Act took effect within the latest 12-month period, this complicates the calculations even more, said Silver.
“There’s some reason to believe that health-care consumption would be stronger in the first half of the year, so maybe that implies that we’ll see a stronger bounce-back in the second quarter,” Silver said in the interview. “On the other hand, you could say: ‘Well this is showing the underlying trend is weaker, so Q2 should be softer.’ So we don’t really know what this means. A lot of this is open to interpretation of the BEA and how they estimate the data.”
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