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How Obamacare Helped Crash the Economy

How Obamacare Helped Crash the Economy

Obamacare did help crash the economy. Only not in the way its critics thought it would.

The Commerce Department on Wednesday revised the growth figures for the first quarter of 2014, and concluded that the economy shrunk at a 2.9 percent annual rate. This comes a month after the government slashed its initial estimate from an annual growth rate of 0.1 percent to a decline of 1.0 percent. At the time, I called it a hiccup rather than a heart attack.

That was some hiccup.

At first blush, the substantial downward revision is something of a mystery. The U.S. economy didn’t suffer from any major shocks. There was no threat of default, government shutdown, huge cuts in government spending, or sharp tax increases. No major financial institution failed. 

Throughout the winter and spring, companies warned that the brutal weather—the disruptive snowstorms, the arctic cold—would have a dampening effect on economic activity. And the weather definitely played a role in stalling the main engine of the U.S. economy—the American consumer. 

The BEA breaks down sectors by their contribution to GDP. Personal consumption expenditures—people buying stuff—grew at a meager one percent rate in the first quarter. And that had a significant impact on businesses. When companies add to inventories—i.e., they sell stuff and then order more stuff in anticipation of higher sales down the rate—at a strong rate, it adds to GDP. When they don’t restock depleted inventories, it detracts from growth. And in the first quarter, it turns out that companies didn’t restock aggressively—either because traffic was slow due to the weather, or because they had ordered too much stuff the last time. Private inventories fell by a stunning 70 percent in the first quarter of 2014 from the fourth quarter of 2013. Inventories alone knocked down the rate of growth by 1.7 percent.

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