Economists expected a pretty sharp slowdown in economic growth in the first quarter — according to Bloomberg's consensus estimate, they expected that GDP grew by only 1.1 percent, down from 2.6 percent at the end of 2013.
As it turns out, it was much much worse. GDP — the most-watched measure of the economy's total output — only grew at an annual rate of only 0.1 percent from January to March of this year, the Commerce Department reported Wednesday morning. This is the slowest the economy's grown since the fourth quarter of 2012. Here's what happened.
1. A really bad winter
Economists had expected that brutally cold temperatures, massive dumpings of snow, and the Polar Vortex would drag down first-quarter GDP — hence their low consensus expectations.
On the surface, consumer spending doesn't appear to have fallen much — it moved from 3.3 to 3.0 percent growth — but dig deeper into the data and it's clear that Americans weren't exactly heading to the mall. Growth in spending on goods fell from 2.9 percent to 0.4 percent. Meanwhile, spending on services picked up a lot, and that spending has special significance.
"With services it was really two things. One was healthcare spending, which jumped hugely, and I'm guessing that had a lot to do with the ACA and people getting insurance and people starting to use healthcare," says James Marple, senior economist at TD economics.
Health-care spending grew by 9.9 percent last quarter, its fastest growth rate since 1980.
In addition, the winter itself inspired some heavier spending, and that's the second major contributor to increased services spending, says Marple. In a colder than usual winter, people cranked up the heat, boosting their utility bills.
The downside is that bad weather can take a toll on construction projects, possibly contributing to the next two factors.
2. Tanking business investment
GDP took a hit last quarter in the area of business investment, particularly in equipment. This can mean anything form the refrigerators at a local restaurant to the forklifts at a warehouse. Business spending on major investments like structures and equipment was really strong in the middle of 2013, but businesses have pulled back. This type of investment fell by 2.8 percent last quarter, far from its 6.5 percent growth rate in the middle of 2013.
3. Housing isn't as hot as it used to be
This was the second straight quarter that spending on housing fell. The fourth quarter of 2013 was the first quarter in which housing shrank since 2010. Since housing posted double-digit growth throughout most of 2012 and 2013, it has cooled off. Rising mortgage rates may have something to do with this — the rate on a 30-year fixed mortgage have risen by nearly a full percentage point since this same time last year.
4. This is the first estimate
The Commerce Department has three regular releases of each GDP estimate, and this is only the first, or "advance," estimate of first-quarter growth. Those estimates can change dramatically, meaning that the next estimate, due out at the end of May, could show that things really aren't as bad as they look now...or meaning that future estimates could show the economy shrank in the first quarter.
"The pattern has been that the first estimate has been significantly revised," says Marple. "It's hard to say whether the revisions take us further away from zero or push us back over the psychological threshold into negatives."