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GDP shrank by nearly 3 percent last quarter

People spent less on healthcare in the first quarter than we had thought, and that pulled GDP down.
People spent less on healthcare in the first quarter than we had thought, and that pulled GDP down.
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It was bad enough last month when the Commerce Department estimated that the economy shrank by 1 percent in the first quarter. Now, the agency has even worse news: the economy shrank by nearly 3 percent in the first three months of the year. Wednesday's figure of 2.9 percent is the agency's third estimate, and it represents the biggest economic contraction since the first quarter of 2009, in the midst of the Great Recession.

Economists believe the unusually harsh weather most of the country sustained throughout winter played a big part in pulling GDP growth downward in the first quarter.

"I would say that more than half the decline we saw was weather-related," says Gus Faucher, senior economist at PNC economics. "That was a big factor behind what happened with consumer spending, [and] I think it was a big factor with what happened with business investment."

The downward revision was mostly due to consumer spending being lower than the department had measured in its previous estimate. That came in part because exports fell by more than originally estimated. In addition, slower healthcare spending pulled the GDP growth rate down by nearly 0.2 percentage points. Big healthcare industry changes due to the Affordable Care Act likely play into that, says Faucher, but exactly why this is happening is complicated.

"I think initially the theory was that [the ACA] might boost services spending because more people were taking advantage of having coverage," he says. "But I think there's some disruption there. I don't know what's going to happen over the longer term."

Those factors helped account for the revision, but the overall contraction came from several places. Business investment in things like buildings and equipment fell in the first quarter. Business investment in inventories also fell last quarter, as did government spending.

In addition, another measure of economic growth, gross domestic income, also fell by 2.6 percent in the first quarter. In theory, GDI and GDP should be the same, but thanks to measurement problems they almost never are. However, that both point in the same direction and to roughly the same magnitude further confirms that this last winter was particularly bad.

The decline isn't expected to last, though. Economists expect a rebound in the second quarter as consumers start spending more again.

Updated. This article was updated to include quotes from Gus Faucher and more complete numbers on healthcare spending.

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