It's Time To Stop Blaming the Weather

It’s time to stop blaming the weather.

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The U.S. economy contracted sharply during the first quarter, much more than the government had previously forecast and the most since the height of the 2008-2009 recession that followed the financial crisis.

Revised figures released Wednesday by the U.S. Commerce Department show the economy contracted at a seasonally adjusted annual rate of 2.9% during the first three months of 2014, far more than the 1% contraction in gross domestic product (GDP) the government had estimated last month.

Consumer spending and exports were also weaker than earlier estimates.

A slight pullback in first-quarter economic growth had been widely expected mainly due to an unusually harsh winter that kept consumers home and disrupted supply chains, among other problems, and the Commerce Department’s first two GDP estimates reflected that.

But economists, analysts and policy makers now say the newly revised numbers reveal broad structural weaknesses in the economy, flaws that go well-beyond issues caused by a temporary spate of bad weather.

“You cannot dismiss the data as being entirely a fluke,” said Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), a public policy and economics research organization in Arlington, Va.

Waldman said the setback in growth should be viewed as “a warning sign” that the economic recovery is far more fragile than previously believed. He said the weather remained a factor, but that it merely exacerbated much larger issues facing U.S. businesses, notably “a lack of certainty and confidence.”

“The range of uncertainties in the past five years has been remarkable,” he said, citing domestic policy uncertainties related to new regulations and health care laws, but also ongoing economic instability in Europe and political instability in the Middle East and the Ukraine.

The economic recovery has occurred in fits and starts and the latest first-quarter GDP reading, which measures all the goods and services produced across the U.S. economy, represents another serious stumble.

Growth is expected to pick up in the second quarter, likely returning to a more normal annual growth rate of between 3% and 4%. But the structural problems, including high unemployment and stagnant wages, remain. Consumer spending, which accounts for more than 70% of the U.S. economy, grew by 1% in the first quarter, lower than the government’s previous estimate of 3.1%.

Consumer spending is directly impacted by related weakness in U.S. labor markets. The unemployment rate is still high at 6.3%, but more worrisome is wages and average weekly work hours, which have been stagnant for months even as consumer prices on food and energy have risen. If workers aren’t getting paid more or working longer hours to make more money, they can’t spend more money.

Another primary cause of the lower GDP figure was scaled back health care spending as the U.S. adjusts to the overhaul of the nation’s health care system under ObamaCare, the president’s sprawling reform effort.

“The small and unexpected decline in healthcare consumption is a bit worrisome,” said Doug Handler, chief U.S. economist at IHS Global Insight.

The Obama administration had previously estimated a strong gain in health care spending as more and more Americans signed up for coverage under the Affordable Care Act. But data derived from an actual survey showed the government's estimate was far too optimistic. Health care spending, instead of rising at a 1% rate, had fallen in the first quarter at a 0.2% rate.

Weak capital spending by businesses in another structural flaw brought about by the pervasive uncertainty.

Businesses, according to Waldman, “are spending just enough to keep operations going, not enough to generate expansion and job growth.”

Waldman said businesses shouldn’t expect policy makers in Washington to provide any solutions. “It’s frozen politically here. The part of D.C. that enacts laws isn’t working very well.”

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