The economy shrank big time in the first quarter. However, there were many transitory temporary factors that passed through, which will begin to reverse in the upcoming quarters. No recession is on the horizon. The economic expansion, however, will not be remarkable. Still, enough of economic juice and lagged impact on jobs assure that 2 to 2.5 million net new jobs will be created this year and the next.
GDP contracted by 2.9 percent in the first quarter. It is hard to recall when a recovering economy had such a large one-quarter negative shock. But those negative contributing factors will turn positive in the second quarter.
Consumer spending was modestly positive, rising 1.0 percent, and will pick up faster in the upcoming quarters. Why? Overall personal income after taxes has been rising at a faster clip of 1.5 percent. A record high stock market valuation and recovering home values are also providing wealth build-up to spend more. The net worth of all Americans combined is at a record high, though the gains are largely going to the top 10 percent of the people who have meaningful exposure to the stock market. With consumers representing a two-third of the economy, the likely acceleration in consumer spending will beef up the overall GDP.
Business spending (formally known as non-residential fixed investment) was slightly negative, falling 1.2 percent. But business spending is poised to turn higher given record high corporate profits and massive corporate cash sitting on the sidelines. Moreover, businesses massively depleted inventory from the warehouses in the first quarter and now they need to hire people to restock those inventory.
Both residential and commercial real estate construction spending fell in the first quarter due to the harsh cold winter. But housing starts have already been turning for the better and more construction cranes will go up since vacancy rates have been falling across all commercial buildings.
Government spending at local, state, and federal levels has not kicked higher even with increased tax revenues. Extra tax revenues rarely sit idle for long. The government is known to spend everything it collects and everything it can get away with. Though one can dispute the efficacy of government spending, at least for the short run, increased spending for local hospitals and for highways lead to job creations and a boost to the economy.
Exports fell sizably in the first quarter and economists are scratching their heads. It looks to be a fluke. Exports will rise as the growing economies of Britain, China, and India buys more of U.S. products.
The forecast is for GDP to expand close to 3 percent rate for the remainder of this year and next. The net job additions will be around 2.3 million per year. Inflation will rise close to 2.5 percent this year and then accelerate to 3.5 percent in 2015.
The uniqueness of the latest GDP figure was related to a massive downward revision to health care spending. There was some confusion on health care spending from the faulty implementation of the Affordable Care Act, which led to a temporary reduction in overall health care spending. Because people get sick and need care within reasonable bounds of actuarial probability, it is very hard to foresee people not spending on health care going forward. That will also boost GDP.
Aging baby boomers will pressure for greater health care spending in the future. People die of untreatable illness such as cancer every day. Most of us will cry over the news of cancer because of our automatic mental reflex to recall only the happy memories with loved ones. Incredibly, many pre-teen cancer patients rarely display sadness. They seem to enjoy every living day because today and tomorrow are always better than yesterday.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.