U.S. gross domestic product fell 2.9 percent in the first quarter of 2014, according to the third revised estimate from the U.S. Commerce Department. Earlier preliminary estimates had reported a smaller decline in GDP.
Contributing to this higher figure for GDP decline were downward revisions to health-care spending following the roll-out of the Affordable Care Act. Government economists initially predicted that newly-insured Americans (and those on new plans) would spend more on healthcare than they did in the first quarter.
Most of the contraction in the first quarter is still attributed to severe winter weather across the country in early 2014 -- including the so-called Polar Vortex that spread across many northern states. It led consumers to go out, and spend, less. Businesses cut back on hiring, production, and investment. Other factors slowing the economy down included elimination of federal long-term unemployment benefits, and cuts to the federal food stamp program.
“This is a terrible number,” said economist John Canally at brokerage company LPL Financial in Boston. Yet, he said the stock and bond markets mostly ignored the statistic, looking forward instead to economic performance in the second quarter, as well as anticipated growth for the rest of the year and into 2015.
“The second quarter looks pretty strong,” said Canally, “with GDP tracking (positive) to between 4 percent and 5 percent. It would be the best run rate on the economy since well before the Great Recession.”
Canally pointed out that consumer confidence is up and so is hiring by businesses. Unemployment claims are down, while the manufacturing sector has strengthened.
There are also worrisome economic indicators on the horizon: rising consumer prices, especially for food and gasoline; stagnant wages for most workers; historically high levels of long-term unemployment; and international tensions in the Middle East, East Asia and Eastern Europe.
Most economists don’t think there’s much danger of the U.S. slipping back into recession -- at least, not without a significant shock, such as a further spike in oil prices.
MIT economist Jim Poterba is president of the National Bureau of Economic Research, which determines when the U.S. is officially in recession. He said the GDP reversal this past winter does teach us something about economic prediction.
“What I think we learned from the Polar Vortex, and we could learn from a protected heat wave, is that there are closer links between extreme weather fluctuations and economic activity than we may recognize,” said Poterba. “Potentially, extreme heat can have similar kinds of effects -- extreme demands on the electricity grid, for example.”
The National Weather Service predicts higher-than-normal temperatures in many regions of the U.S. this summer, including the West Coast, the Southern Great Plains, the Southeast and Mid-Atlantic States.
Ever since the oil crisis of 1973, when oil prices nearly quadrupled as a result of an OPEC embargo following the Yom Kippur War, there has been a ban on U.S. crude oil exports. But that may change.
In two rulings, yet to be confirmed, the U.S. Department of Commerce will allow two private companies to export a special type of crude oil. It's a tiny opening in what could be a big change for the oil industry.
The crude oil at issue is a specific type of lightweight crude called condensate. It’s very different from what you probably picture when you think of crude oil. Condensate is not the thick, black oil that came a “bubblin” out of the ground in the opening credits of The Beverly Hillbillies. Condensate is thinner, it can look like tap water, and it’s highly volatile.
“Condensate,” says analyst David Bellman, “is actually one of the crudes that would be the easiest to refine.” It would be the easiest to refine, if it weren’t for one problem. “The problem is that the refining industry, for the last couple decades, has been told that crude oil is going to get heavier and heavier,” says Bellman.
As a result, refineries invested in equipment designed for refining heavy crude. But since the fracking boom, 96 percent of new oil production is ultralight, not heavy crude. “It’s not a great fit for the refineries in the U.S.,” says Severin Borenstein, co-director of the energy institute at the Hass School of Business at Berkeley.
Oil producers are worried that this bottleneck could get worse, driving down the price of condensate. “So the argument they are making is, they should be allowed to export those crude products,” says Borenstein.
Industry analyst Fadel Gheit says lifting the ban would lower crude prices on the global market. But it would raise condensate prices in the U.S. That’s bad news for U.S. refineries, as evidenced by a dip in their stock prices today. “They had one of their worst days in years,” says Gheit.
There is no consensus among analysts on what lifting the ban would do to the price consumers pay for gas at the pump.
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