Economy: 1Q Looks Even Worse, But 2Q Looks Good by Gary D. Halbert

FORECASTS & TRENDS E-LETTER

June 24, 2014

IN THIS ISSUE:

1.  More Bad News Expected Tomorrow for 1Q GDP

2.  Why Healthcare Spending Was Below Expectations

3.  More Businesses Closing Than Starting Up, A First

4.  Signs the Economy May Finally be Getting Traction

5.  Second Quarter GDP Expected to Come in Strong

6.  Texas Immigration Crisis: UPDATE (They Knew)

Overview

The government’s final estimate of 1Q GDP comes out tomorrow, and it is expected to be revised from -1.0% to near -2.0%. Based on recently released data, it is clear that healthcare spending by consumers was considerably lower in the 1Q than first estimated. We’ll look at some of the reasons why.

From there, we’ll look at some disturbing economic data which show that businesses in the US are shutting down faster than new ones are starting up. This has never happened before in America according to a new Brookings Institute study.

Next, we’ll review some recent developments which suggest economic growth has accelerated sharply in the 2Q. Most forecasts for 2Q GDP are at 3% or better. Our first look at 2Q GDP will come in late July.

Finally, there is news that the US Immigration and Customs Enforcement (ICE) agency knew back in January that a flood of undocumented children – specifically 65,000 – were going to pour across the Texas border this year. They requested help on a government website.  This has the potential to be really BIG!

More Bad News Expected Tomorrow for 1Q GDP

We’ll get the Commerce Department’s third and final estimate of 1Q GDP tomorrow morning at 8:30 Eastern. You may recall that the government estimated on May 29 that the economy contracted by a full 1% in the 1Q. Most forecasters are now estimating that tomorrow’s third estimate will be even worse. The consensus is for a further reduction to -1.8%, with numerous analysts predicting a drop to -2.0% or more.

So how did they get this one so wrong? If you recall, the first estimate in late April showed 1Q GDP down by only 0.1%; then came the second estimate at down 1.0%; and tomorrow we’re expecting another downward revision to near minus 2.0%. Here’s at least part of the explanation: The main culprit it now seems was lower than expected healthcare spending by consumers in the 1Q.

The Commerce Department’s Quarterly Services Survey (QSS) showed that healthcare outlays were not nearly as strong as the government had assumed when it published its first and second 1Q GDP estimates in late April and May. With the QSS data in, the government now knows that healthcare spending in the 1Q was well below the previous assumptions.

The mainstream media has led us to believe that the weak economy in the 1Q was caused almost entirely by the severe winter weather. Yet many of us felt that it had to be about more than just the cold weather. And as I will discuss below, in retrospect, it should not surprise us that healthcare spending was lower than expected in the 1Q, given all the uncertainties surrounding Obamacare.

So don’t be surprised if we see 1Q GDP revised down to -2.0% tomorrow morning. Expect the mainstream media to respond by saying it doesn’t matter because 2Q data is looking so much stronger. While that may be true, we won’t get our first look at 2Q GDP until the end of July.

Why Healthcare Spending was Below Expectations

The fact that healthcare spending was not up as expected in the 1Q really shouldn’t have come as a big surprise. There is still so much uncertainty on the part of consumers as well as healthcare providers due to Obamacare. Most consumers don’t know just what is covered, not covered or somewhere in between.

Many consumers who have purchased health insurance on the exchanges don’t know what medical services are covered by their insurance, and in many cases are not clear about what their deductibles and/or co-pays may be – much less their federal subsidies. Likewise, many physicians are still not clear how they will get paid for many procedures and even routine patient visits. Ditto for healthcare clinics and even some hospitals.

Likewise, it is still not abundantly clear what will be paid by Medicare and Medicaid. As a result, many consumers are delaying medical procedures and even doctor visits until they are more certain of their coverage and what their deductibles and/or co-pays will be.

And let’s not forget that only apprx. 8 million people purchased health insurance on the federal and state exchanges during the initial enrollment period from October to April. It is not entirely clear how many of the 8 million were previously uninsured, but a recent survey from the Kaiser Family Foundation puts the number at 57%.

 

Economy GDP

Also, the tepid economic recovery continues to impact the health sector. The slowdown – and even decline – in personal wealth has tamped down demand for healthcare. All of these uncertainties have created a “new normal” in healthcare spending patterns. And it’s still too early to see how all this will play out over the next few years.

More Businesses Closing Than Starting Up, A First

A new study from the Brookings Institute released in May found that more businesses in America have been closing down than those starting up, for the first time ever. Furthermore, this trend has continued since 2008 despite the economic recovery.

Brookings studied data from 1978 to 2011 and found that businesses were closing faster than new ones were being formed since 2008, a first for America. Overall, new businesses creation (measured as the share of all businesses less than one year old) declined by about half from 1978 to 2011. Put differently, the American economy is less entrepreneurial now than at any point in the last three decades.

 

Economy GDP

Worst of all, this trend is showing no signs of reversing even though the economic recovery is now into its fifth year. The Brookings authors didn’t mince words about the stakes here: “If the decline persists, it implies a continuation of slow growth for the indefinite future.”

This lack of economic dynamism, particularly the steep drop since 2006, may be one reason why our current recovery has been so weak. The authors of the Brookings study dug beyond the national numbers to the state and metro levels and found that they generally mirrored the national trends.

Perhaps the worst statistic in the latest Brookings study is this one: From 1978 to 2011, the rate of new business formation has declined a stunning 47.2%, with the worst of the drop occurring since 2006.

The five healthiest states for business start-ups were New York, Illinois, Texas, New Jersey and Missouri.  The five worst states were Alaska, Hawaii, Vermont, New Mexico and Wyoming.

Signs the Economy May Finally be Getting Traction

Enough of the bad news – let’s look at some encouraging developments. There are more recent signs that the economic recovery may be gaining some traction. The Fed periodically publishes the results of economic surveys it takes from businesses in each of the 12 Fed Districts. The so-called “Beige Book” is published eight times per year. The latest survey from June

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