Why Did GDP Fall So Dramatically Last Quarter?

Robert Pollin, professor of economics at the University of Massachusetts Amherst, gives a good high-level discussion of why the GDP results for last quarter were such a train wreck. Remember that analysts and economists were blindsided; no one expected to see GDP fall at that rate. As we wrote, the tendency among pundits has been to treat the results as of not much concern, since that period is past and some of plunge can be attributed to one-off factors, most importantly, abnormally cold weather. But Pollin explains why this is insufficient and why the bad results highlight how wrongheaded current austerity policies are.

More at The Real News

A key section of Pollin’s remarks:

What happened in the last quarter was broadly consistent with the weakness of the recovery, just to give some evidence on that. In the previous eight recessions that the U.S. has had since World War II, you see strong recoveries after the recession ends, so that, say, three months after the recession ends, the economy is growing on average at about four and a half percent a year. That’s positive four and half percent growth on average. In this recession, after the recession ends in 2009, average growth has only been 2.3 percent–half the rate of improvement that we’ve seen in the eight previous recessions. So we could say that this massive one-quarter contraction was a blip, but it wasn’t just a blip, because it comes amid a very weak recovery that’s been going on now for five years.

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  1. Fiver

    That the recovery is weak and built on sand are givens. But I’m not sure either that overall weakness, or any change in an identifiable fiscal policy is directly linked other than (correct me if I’m fuzzy here) the failure to extend long-term UI benefits, which I don’t think could possibly account for that much of a drop in spending.

    Is the suggestion that the Federal Government spent less elsewhere in the belief Obamacare would generate equivalent spending? That much less?

    I wonder if ‘weaker’ here is not misused, as if a ‘stronger’ recovery could’ve coped better with a once-in-decades bad winter? I also wonder if the idea that it was largely due to ‘bad weather’ would be too controversial to consider from the point of view of impacts due to Climate Change now and going forward. After all, even 1% of GDP is what current mainstream projections are for what Climate Change will cost each year by the end of the century. The idea that severe events are already the new normal is not a welcome one for Governments.

    Given a system in its entirety as rotten as I believe, I expect the domestic data can ‘support’ this farce a while yet, but there are way too many important balls in the air right now to expect no fatal fumble.

    1. Francesco

      Climate change is 99% real and probably at least 50% man made, but the government is not worried about it, but they need to look so worried, to justify something else. What’s terroryzing them is the fact the even the secondary US oil peak is very close. After then, the US GDP will collapse. There is a relation between GDP and energy. For oil we need about a 0,4% production increase for to increase GDP 1%. If not for north america, oil peaked in 2007 and is now on a plateau. There are some persistent myths like that OPEC has a lot of spare capacity: it’s false, most of producers are now in decline and the only one country where is some new capacity is Iraq (that’s why… you know). When the global oil plateau will not be a plateau anymore, decline will follow a rule well know by geophysicists: giant fields decline on average 6%.
      a year, smaller fields close to 10%. So in essence, we’re at the beginning of the great worldwide GDP contraction which obviously will destroy this financial system to the ground and a lot of much more harmful things. In 2035 there will ne no oil available for export. Producers will keep what’s remaning for themselves just to stay alive. A 4 degrees climate change will not happen, because there are not enough hydrocarbons left with an acceptable EROEI and it’s EROEI that matters not ROI. Money is a mind construct, oil is real.

      1. Moneta

        While I agree with you on the secular trend, cyclically, we can easily end up with a glut that will give the illusion to North Americans that we do not need to change our ways and this could last another decade or 2.

        For example, I believe that most of the emerging market growth of the last couple of decades was to feed our consumerism. Most of these countries have not adequately built up their social infrastructure so if we hiccup, they will suffer. And their energy consumption could fall off a cliff.

        How many more empty cities can China built before it hits a snag? Do you really believe the US will let China and India consume the oil it needs to maintain its own entropy without putting up a fight?

        1. Francesco

          About 10 years ago the Hirsh report reccomended to start the transition at least 15 years before peak oil. Conventional peak oil was in 2006, global peak oil will be within 10 years depending on the various sources. Even EIA is a peak oiler now having drastically changed their view. How could they insist in the shale miracle after the Monterey debacle ? In their latest report they say that after 2020 the US will have to rely more on OPEC than now, but EIA is infamous in being overly optimistic like the FED, BCE, FMI or any other gov sponsored organization. They at least partially know the truth, but they always lie. The big fact is that OPEC is overestimating their reserves, all the signals of a huge crisis are here. But also in Bejing know the truth and above all is well known in Moscow. By the way, you don’t have to wait for a future global war, because a world war is already here. Of course it’s financial because only some crazy neocons could think to win a nuclear war. Imagine how many nuclear weapons, chemical and bacterial weapons are already on the US territory when drug dealers are able to send hundreds of tonns of cocaine, heroin, pills and all the other shit every year ! As a european I’m watching a large section of the continent being sacrified and cut off from the energy routes. As in the past the perifery is being destroyed first, a few years later also the mighty Rome will fall. Good luck with this tragic and ridiculous debate about the reason of the weak GDP and the next moves of the central bankers. They are just soldiers, albeit high ranking officials. Banzai !

  2. scott

    We’ll look back on North Seal oil coming online as a disaster because it reversed the energy efficiency trends of the 70s and early ’80s, and brought about the SUV, exurban sprawl, etc. I had a Mazda 626 sedan in ’86 that got 44 MPG highway. The same car now weighs 1000 lbs more, does 0-60 in half the time, and barely gets 40 MPG.

    1. lakewoebegoner

      pre-2000 subcompact cars were/are death traps—those extra 1000 lbs. of hi-strength steel, etc. are a big factor in the big drop of road fatalities. air bags alone can’t cut it.

      now whether you believe that customers have a right to choose between safety and fuel economy, that debate is for a different thread.

        1. John Day

          Remember “stayin’ alive at 55”?
          Kinetic energy goes up as the square of speed.
          Your body contains 160% of the kinetic energy at 70 MPH as it does at 55 MPH.

  3. Banger

    Those GDP figures, according to conventional wisdom, are a blip. Whether or not that is the case we are in a new model for the economy–slow growth, low volatility (overall, with some mini-bubble-churn), and relative stability as we drift and drift. In mainstream thinking there seems to be very little thought of the future–I get the sense that everyone is waiting for the end of the world.

    1. Jim Haygood

      If trillion dollar deficits, zero interest rates, and a three trillion dollar expansion of the Fed’s balance sheet qualify as ‘austerity,’ I’d hate to see what ‘pro-groaf’ policy looks like.

      Weak groaf comes from decades of malinvestment and bubble-friendly policies. Nothing has changed, except that this go-round features even worse malinvestment coupled with an EVEN BIGGER bubble.

      When Bubble III finally blows, it’s gonna be OVAHHHH for the BOOMAHHHHHS …

      1. Steven Greenberg

        “If trillion dollar deficits, zero interest rates, and a three trillion dollar expansion of the Fed’s balance sheet qualify as ‘austerity,’ I’d hate to see what ‘pro-groaf’ policy looks like.”

        No, what they prove is what Keynes has said. In a depression, monetary stimulus is like pushing on a string. You can encourage investment by making it cheap and giving tax cuts, but if there is no demand, then there is no reason to invest. The only way for the people with all the money to make even more is to play financial games with derivatives and pumped up stock market values. There is less money to be made by producing goods and services for which there is not enough demand.

        With trillions of dollars of back logged infrastructure investment and signs of crumbling roads and bridges because of this under-investment, you would think that people with a grain of sense could figure out that this is a golden opportunity to catch up. But, Nooo! We can’t afford it now with low interest and lots of slack in the economy. If these conditions don’t encourage government investment, why would we think it would encourage private investment?

        Some entity with a larger world view than the individual capitalist enterprise is going to have to wake up and take some action before we can get moving again. I wonder what kind of entity that could be? It would have to be an entity that would realize the fruits of this reinvigoration of the economy cannot flow only to the top of the economic pyramid.

        1. Francesco

          We’re living on a finite planet, we’re close to 8 billions, we have already consumed all the cheap resources. People don’t understand the exponential function, economists for first. In our real world we’re not limited by electronic money or by demand, but by cheap energy supply. If, by accident, tomorrow, each US or european citizen will receive a big check to be spent, they will immediately try to revive the consumption hyperspeed but, sorry, there is not enough oil, OPEC spare capacity is less than 2 million barrels, US drillers are like an army of moles, but it’s not enough. Keynes is dead, he lived in a totally different world. He was, at his time, quite right, but this is irrelevant today when his nephews are on the contrary blatantly stupid. There is only one economical theory able to capture the reality of our age of diminishing returns, it’s ecological economics. Read Herman Daly or Charles Hall, not Paul Krugmann. Of course you won’t because ordinary people, not just the puppet masters, don’t want to listen because they don’t want to change . Give me back my gallon of gasoline at 1 $, I need it for my new big car I’ve bough yesterday with a subprime loan !

          1. Steven Greenberg

            Apparently there is so little oil left in the world that the big oil companies feel the need to take oil and other energy sources off the market. Hence our need for sanctions on Iranian oil, Russian Gas and Oil, arguments with Venezuela, and more chaos in Iraq.

            If we let all this oil onto the market freely, there is so little of it, that the prices would remain stable?

            Yes, resources are finite. We should use them judiciously. Part of the stimulus should be investment in research and development of ways to conserve energy.

            None of this detracts from the fact that whatever economic policies our government is pursuing now, they could stand a huge change with a large dose of understanding how the economy works.

            1. Francesco

              Energy is a very complex topic with a lot of counterintuive feedback loops at work but without a good comprehension of it, it’s impossible to have even the most pale understanding of this world. It seems you’re interested in this topic, so I suggest you to spend a couple of hours on these related presentations. The first one is a recording of a speech by Steven Kopits, former Managing Director, Douglas-Westwood, on the different approaches to global oil market forecasting. The second one is from professor emeritus Charles Hall about peak oil, declining EROI and the new economic realities. Take your time, is worth the effort.



          2. Banger

            I sense that there are growing numbers of people who might not want to buy mass quantities of junk and energy intensive goods and services because I sense we are on the cusp of cultural change. But I do believe that the international oligarchy sees austerity/slow growth policies as a way of dealing with climate change and, perhaps, population growth since they’ve made it clearl that they believe their hold on power lies in the carbon economy. Besides, they like us all to feel as much fear and loathing as possible–makes us easier to rule.

      2. susan the other

        So really, RockPaperScissors really is our best policy. Have a global forum sit down to this roulette wheel of policy making, and within 4 hours they will have a report submitted to some authority that can enact their their sentiments. It would be quick and dirty and the beauty of it is it is quick. If it doesn’t work a new RPS can convene and change the outcome just like a session on a ouija board.

  4. David Lentini

    More evidence that economics is not a science, and that neo-classical economics in particular is a complete failure. Further, the past seven years of arguing that the present is just “the exception proves the rule” and good time are just another quarter away, have demonstrated how our mainstream economists and pundits are nothing but incompetent and mendacious.

    1. fresno dan

      24 or so quarters in a row of wrong forecasts and missed events, and you seem ready to dismiss whatever economists have to say…

  5. paulmeli

    If one is familiar with MMT such a drop in GDP growth would be expected…GDP growth is a function of spending growth and spending growth, the main driver of which is public spending, has fallen off the table over the past 5 years.

    Since WWII, federal spending averaged 7.2% growth annually, not adjusted for inflation. Between 1985 and 2008 growth averaged around 5.2 %, and post 2008 it has averaged just 3.8%. 2012-2013 spending increased from $3772.7T to $3792.9T, an increase of just 0.5%.

    A drop in spending of this magnitude is unprecedented post-WWII, nearly 70 years.

  6. paulmeli

    “a three trillion dollar expansion of the Fed’s balance sheet …”

    …which bought existing securities. In other words, changed the composition, not the level of financial assets, and thus is unlikely to have increased spending in any significant way.

  7. Rich Caldwell

    Can you say “sequester”? Fiscal austerity is producing a predictable result – GDP contraction. C’mon, Congress – wakeup!

    1. Jim Haygood

      Currently the CBO estimates a budget deficit of 2.8 percent of GDP in 2014. That’s almost indistinguishable from the 40-year average of 3.1% of GDP.


      Austerity? Only in the relative sense that if you’re used to driving 90 mph, slowing to 65 mph for a speed trap feels like walking speed.

      1. Francesco

        Austerity is a noble word but this is NOT austerity, expecially in Europe where I live. This is theft, a unprecedented transfer from the productive non bankrupt workers to the bankrupt, unproductive financial system. I can understand if after this criminal actions we end up having decent condizions down the road, but the only one effect is this one: the bankrupt financial system is still bankrupt, while the productive non bankrupt sector is now much less productive and it’s bankrupt. I think it’s impossible to find a better way to accellerate the demise of our civilisation. By an evolutionistic point of view this means it wasn’t a strong one and it’s better to bury it with their participants. In a far future nature will select something better. RIP.

      2. YankeeFrank

        Comparing deficits in what clearly is a huge, drawn out recession, to the average of the past 40 years with its massive growth, and still finding it .3% lower, is austerity.

      3. paulmeli

        It’s spending that generates Income, and thus GDP, not deficits. Deficits are a measure of how much the non-government was able to save, and as such are pretty much irrelevant as far as GDP is concerned.

  8. Eureka Springs

    Where’s Craazy asking whether hookers and blow are included in this GDP cocktail? What about derivatives and swaps, or as I call it counterfeit monopoly money? Are people further legitimizing that ponzi in fretting over GDP?

    When military madness and health buy-products are soaring along with fuel, propane and other food essentials. With the ponzi schemers in charge I can’t believe any numbers “they” tell us, much less get myself worked up over GDP. Rising or falling at least 90 percent of us are meaningless to GDP hair on fire monitors.

    Establishing affordable giga fiber internet to every home in the land…. Tri-care or single payer for all, mass transit projects and a solar panel (or 8) on every southern facing rooftop. Reducing MIIC at least 85 percent. Reducing prisons, ending the war on drugs, reducing homeland security, CIA to NSA too… all if done correctly would eventually lower GDP wouldn’t they?

    But most here want to speculate on oil…. when the biggest point is we are not allowed to know wtf is or is not going on and even if oil filled oceans that is the last kind of way we need to expand. Like fashionable Chinese women of olde we need to reduce not only carbon and nuclear, etherial GDP, but the bind the size of the human footprint.

    1. fresno dan

      SNAP – I say if we can have a supplemental nutrition assistance program, we can have a supplemental nookie assistance program.
      Sure, the price of the hookers remains the same, but the quantity has gone way down…
      theres a lot of deflation….

  9. TedWa

    Whewww, it’s a good thing we can create money to pay off our debts. Platinum coins anyone?

    Of course, demand creates jobs, not the 1%. Spurring the economy should have included bailouts for the citizens. But in true economist fashion, the banksters were the only bailed without any moral compunctions, saying the only moral hazard would be bailing out Main St. Amazing.

  10. Romeo Fayette

    I know the “weather” anecdotes are a tired, catchall excuse, but data confirms the weather’s contribution to the contraction.

    For example, look at railtraffic, which was cascading lower at a -4% rate through February (http://thebuttonwoodtree.wordpress.com/2014/02/23/top-newsstuffs-february-17-23/), but bounced back with +7% prints in May (http://thebuttonwoodtree.wordpress.com/2014/06/01/top-newsstuffs-may-26-june-1/), raising ytd comps from sub-zero to +4% trend.

    Retail sales +4.3% headline, +2.8% core
    Commercial bank credit +4.8%
    Durable goods orders +10% annualized so far in Q2 (inventories are piling up but shipments just increased to +3.9% y/y)
    ISM @ 55.4
    Consumer indebtedness +3.7% (admittedly, household releveraging might be offset by some corporate & public sector deleveraging)

    You have some irrevocably lost production, but you have to acknowledge the pent-up demand and its potential to maintain a trend growth.

  11. impermanence

    Everybody knows that the GDP figures are a complete fiction, yet even on a discussion list such as NC, people discuss them as if they were actually indicative of something real.

    Simply keeping in mind that debt is included in the GDP calculation is like me giving you a million dollar loan and you adding this to your net worth. You can not have been hollowing out the economy over the past forty years and having growth simultaneously.

    On top of that, the quality of much of the “growth” is fictitious, as how many hundreds of billions have been thrown down the crapper into malinvestments such as absurd housing and commercial real estate projects, not to mention all the luxury non-sense the wealthy are consumed with possessing.

    The true measure of an economy should be its investment in/ and production of wealth, not consumption.

    1. indio007

      Malinvestments like fusion.
      Do you how many trillions have been wasted to engineer a single premise?
      His it ever occured to them the can’t do it because their theories are incorrect?
      Nope. The just need more money and mother nature will obey. NOT!

  12. susan the other

    The sticking point in all this hand-wringing is that nobody can figure out how to make a profit in the “New Normal” going foreward. I would always submit that profit is nonsense. It is just a way to price in an exorbitant skim, just because you can, and then call it the law of capitalism. Which, as we all know, is nonsense because it has no laws.

  13. Dan

    I looked up the results on BEA, and even their press release confused the issue.
    Saying that GDP contracted 2.9% Quarter to Quarter simply isn’t correct. When you download the tables and look at them in excel you see that GDP contracted $118.1B real dollars against a 2013 Q4 GDP of $15.942T. That is a quarter to quarter decline of 0.74%. The -2.9% number comes from “annualizing” that rate by multiplying it by 4. Then it sounds really scary, but it is really just a spurious forecast, and I’m not sure this Pollin fellow really looked into the numbers first before saying what he did. RGDP declined by 0.3% in 2008 compared to 2007, and another 2.8% in 2009 compared to 2009. Those are full year measures, and so if you directly compare it to a single quarters’ annualized decline of 2.9%, then yes it is bad, but only if the economy continues on the same trajectory for another 3 quarters. The 2014Q1 RGDP number is higher than the same quarter a year ago by 1.5%, which may be a better measure since it effectively adjusts for seasonality a bit.

    This is not to discount/ignore all the arguments concerning austerity, weak recovery, etc. I just wish everyone would be careful about how we discuss these numbers.

  14. ewmayer


    “When you download the tables and look at them in excel you see that GDP contracted $118.1B real dollars against a 2013 Q4 GDP of $15.942T. That is a quarter to quarter decline of 0.74%. The -2.9% number comes from “annualizing” that rate by multiplying it by 4. Then it sounds really scary, ”

    You are incorrectly comparing an absolute (nonannualized) number – the drop of $118.1B – aginst an annualized number, the 2013 Q4 GDP of $15.942T. You can use either quarterly or annualized numbers to get the -2.9%, but you must use them consistently. Thus, your quarterly drop of $118.1B must be divided by the quarterly (nonannualized) Q4 GDP number, which is $15.942T/4 = $3.9855T. Then, -$118.1B/$3985.5B x 100% = -2.965%, which (I`m relying on your numers here) properly rounded-to-nearest-tenth-of-a-percent actually gives -3.0%.

  15. different clue

    Hydrocarbons aren’t the only fossil carbon source. There is lots of just-plain coal, which economies will keep burning lots of. And even more than before when oil runs short. And we don’t have to raise the average temperature 4 degrees just by burning coal, gas, and oil. We just have to raise the temperature enough to thaw the arctic and subarctic and release all the permafrost-sequestered biocarbon.

    A 4 degree heatup should be easy to achieve.

  16. Tom W Harris

    “Why Did GDP Fall So Dramatically Last Quarter?”

    Because the oligarchs stole more of it than ever, that’s why.

    This has been another in the series Simple Answers to Really Easy Questions.

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