Looks Like GDP Will Have A Hard Time Getting Up To Federal Reserve Forecast

Lindsey Group: Economic 'Walls Are Closing In'

Friday, 13 Jun 2014 12:23 PM

By Dan Weil

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The news for the economy just keeps getting worse, according to a commentary from The Lindsey Group, an economic advisory firm.

On Tuesday, the Bureau of Economic Analysis (BEA) released data suggesting that healthcare services shrank 1.3 percent in the first quarter from the fourth quarter, the report says.

That's significant, because the BEA had assumed Obamacare would spark growth of 2.3 percent, and that's the figure it used for healthcare services in estimating GDP. The BEA's latest estimate was that GDP shrank 1 percent in the first quarter.



"It is reasonable to assume that, given the size of this sector, this will cause the estimate of first quarter growth to be revised down by a further percentage point, making it a minus 2 percent," The Lindsey Group writes.

"Now both BEA and Obamacare look foolish."

The Federal Reserve's March forecast of 2.8 percent to 3 percent GDP growth for 2014 also looks "foolish" now, the commentary says. Growth will more likely total 1.75 percent for the year, it states.

"If one pencils in a -2.0 [percent] for the first quarter, even a string of four percent quarters for the rest of the year only gets 2.5 percent growth, and the more likely result of 3 percent quarters produces 1.75 percent for the year — well below the March projection of 3 percent and the December projection of 3.25 percent," the report notes.

"The walls are closing in, and . . . the news coming out of the FOMC [Federal Open Market Committee] over the next six months will be a painful combination of downgrades to growth and an acceleration of the expected date of policy tightening."

Meanwhile, Johns Hopkins University economist Laurence Ball contends that the Great Recession, which ran from 2007 to 2009 in the United States, is still affecting economies around the world, limiting their growth potential.

"Recent recessions have had dire effects on economies' productive capacity," he writes in a paper published by the National Bureau of Economic Research. "Countries with the deepest recessions have also experienced the greatest long-term damage."

The U.S. loss of potential economic output totals 4.7 percent, Ball calculates.



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