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Obamacare Slowdown: Economy Shrank at 1% rate in first quarter
Howard Richman, 5/29/2014

On May 29, the Bureau of Economic Analysis reported that the U.S. economy shrank at a 1.0% rate during the first quarter of 2014. The size of the slowdown caught analysts by surprise. As recently as April 29, the Associated Press was predicting a 1.1% growth rate during the first quarter, not a 1.0% shrinkage rate.

The following table shows the contributors to real GDP growth. You can add up the contributions from the components in each column to get the rate of Real GDP growth shown in the bottom row:

Contributors to Real GDP Growth
Quarter 2013-1 2013-2 2013-3 2013-4 2014-1
Household Consumption 1.5% 1.2% 1.3% 2.2% 2.1%
Business Fixed Investment -0.2% 1.0% 0.9% 0.4% -0.4%
Government Consumption -0.8% -0.1% 0.1% -1.0% -0.1%
Net Exports -0.3% -0.1% 0.1% 0.9% -0.9%
Inventory Change 0.9% 0.4% 1.5% -0.1% -1.6%
Total Change in Real GDP 1.1% 2.5% 4.1% 2.6% -1.0%

The largest component of the slowdown was the decrease in inventories. If not for that, economic growth would have been a positive 0.6%. Inventories tend to go up and down. The decrease in inventories by 1.6% during the first quarter of 2014, which made GDP artificially low, corresponded with the increase by 1.5% in the third quarter of 2013, which made GDP artificially high.

On April 30, the Obama administration's Council of Economic Advisers attributed the slowdown to the cold weather which kept consumers home during the first quarter. This is nonsense. Increased consumption would have contributed more than 2% to economic growth had not other factors intervened.

Other causes of the slowdown were: (1) the fall in business fixed investment which contributed a negative 0.4% to GDP growth, and (2) the fall in net exports which contributed a negative 0.9% to GDP growth.

We were not surprised by the fall in business fixed investment. Back in December, we predicted that ObamaCare and the Obama administration's other anti-business actions would dampen business investment, specifically:

The uncertainties caused by arbitrary regulations by agencies such as the EPA and arbitrary suits and prosecutions by the Department of Justice have created a belief that the administration is hostile to private business.  As a result, businesses may be retaining earnings or buying back outstanding shares rather than investing their earnings and expanding.

As for ObamaCare, it has encouraged small businesses to limit employment to fifty workers. Bigger businesses get a one-year reprieve before they become subject to its onerous provisions. The uncertainties of health care costs discourage business expansions and startups.

Net exports (exports minus imports) worsened for a different reason. The Obama administration continued to let China and other mercantilist countries run trade surpluses with the United States in order to steal U.S. industries. Meanwhile Quantitative Easing, which temporarily improved the U.S. trade balance, is now having the opposite effect.

Economic analysts are predicting a rosy future despite the slowing economy in the first quarter. They failed to predict this slowdown, and are being overly optimistic about the coming quarters. They haven't yet figured out the negative consequences of Obamacare and the administration's other anti-business actions.

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