Did Obamacare start throw off first quarter GDP numbers?

The announcement Wednesday that the U.S. economy contracted by nearly 3 percent in the first quarter of 2014 appears to be more a reflection of the unknowns of Obamacare than an overall assessment of the nation's economic well-being.

The Commerce Department's report that the U.S. gross domestic product, the broadest measure of goods and services produced across the economy, shrank at an annual seasonally adjusted rate of 2.9 percent was a huge revision from the earlier projection of a 1 percent decline. GDP figures are usually revised two times after their initial announcement as the government is able to gather more data but it is usually by tenths or a half of a percentage point.

This revision was the largest since 1976 and made the first three months of this year the biggest decline in the past five years and the fourth-worst quarter for the economy since 1980.

So what happened? Ever since the original estimate was released, the Commerce Department and many other analysts have been blaming the exceptionally tough winter for the poor numbers. While that is definitely a large part of it, another part was that January marked the start of the Affordable Care Act and the government didn't know how to estimate its impact.

How big was the impact of Obamacare?

"It was huge," says Doug Handler, chief U.S. economist for research firm IHS. "The original assumptions had included some very sizeable monthly gains in healthcare expenditures." In other words, the GDP shrank because people were spending less on healthcare than expected.

In its earlier estimates of economic activity for the first quarter the Commerce Department used Medicaid benefits and enrollments on new insurance exchanges to estimate healthcare spending. In the latest version, researchers used a Census Bureau survey on actual healthcare spending.

Healthcare wasn't the only thing dragging down the GDP. The growing trade deficit also contributed. The decline in first-quarter exports was revised to 8.9 percent from 6 percent. Handler says he expects the slowdown in the world economy to subtract 0.2 percent to 0.3 percent off annual growth for the next couple of years. However, he sees that as a positive.

"[The trade deficit is] a function of stronger growth," he said. "That's because of higher imports which are a function of stronger investment and stronger consumer spending."

Handler and many other analysts see the first quarter as a one-off and many recent figures, especially job growth, give no indication of anything but an expanding economy. In mathematical terms it would take a phenomenal burst of growth for difficult to see the year's GDP growth hitting the 3 percent mark some had predicted at the start of the year. Despite that economists expect to see significant growth over the second half of the year.

In a note to investors, analysts at Capital Economics wrote, "Although the bigger than expected fall in GDP in the first quarter has forced us to revise down our forecast for growth in 2014 as a whole, it doesn't alter our view that the economy is fundamentally sound. Annualized growth will rebound in the second quarter and settle around 3 percent thereafter."

Handler expects increasing wages and an improved housing market to be a large catalyst for the growth. He admits this is not a sure thing and that so far the housing market has only gotten better for the most expensive homes.

"We are expecting something a bit more pervasive than just growth in the high end of the housing sector," he said. "The housing numbers, while they're much improved than where they had been, they're still historically low. Our models are saying more growth, more growth even with fairly conservative assumptions here. I'll readily concede that that's one of the risk factors in our model and if you'd asked me what 2014 numbers would be six months ago I would have told you something much higher than we have now."

  • Constantine von Hoffman On Twitter»

    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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