Three Red Flags in GDP Report

The Commerce Department reported Thursday that, in its latest estimate of 1st Quarter GDP, the economy shrank by 1.0% in the first three months of the year. This was a sharp reversal from its initial estimate, which suggested the economy grew by an anemic 0.1%. Many pundits have tried to blame the weather for the disappointing results. A deeper look inside the numbers, however, raises 3 troubling signs for the economy.

1. Cash-Strapped Consumers. The Commerce Department reported that the negative contributions to GDP in the 1st Quarter were "partly offset by a positive contribution from personal consumption expenditures." Personal consumption grew 3.1% in the quarter, down slightly from the end of last year. This spending growth, however, is increasingly coming from savings.

According to the Commerce Department, the personal savings rate declined to 4% of disposable income, lower than last year and 26% lower than two years ago. Disposable income at the beginning of 2014 increased just 0.7% over the end of 2013. Consumer spending drives more than three-quarters of the economy. It is unlikely that the second quarter will benefit from a new spurt of consumer spending. Indeed, recent data on retail sales in the first months of the second quarter indicate the consumer is pulling back its spending.

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