http://thereformedbroker.com/2015/05/24/ignore-the-annual-first-quarter-recession/
Every year we have a recession in the first quarter and every year people get hysterical. And every year the economy rebounds into summer and the hysterics roll back their estimate cuts and their calls for economic demise. Putting aside why economy-watchers are so easily fooled or confused after so many episodes of the same show, it’s worth understanding why this occurs.
Bank of America Merrill Lynch’s US economist Ethan Harris explains the quirks in the data that lead to this annual freak-out (emphasis mine):
The economy has a major seasonal recession in every 1Q and some of the secondary indictors that go into GDP are not seasonally adjusted… Work at the Philadelphia Fed shows that over the past 30 years GDP growth has averaged 1.9% in 1Q and 3.0% in the rest of the year, suggesting about a percentage point downward bias in the quarter…The bottom-line from all of this is that bad seasonals probably sliced about 1.5% off of growth in 1Q and added about 0.5% to other quarters of the year…the pattern is not just a matter of a few years. Moreover, the story is also a lot more credible if there is a good narrative behind it. Here is that narrative.
Every year there is a major drop in GDP in the first quarter as the holiday season ends and severe weather kicks in. How big is this recession? The government does not publish unadjusted data for real GDP, but there is unadjusted data for nominal GDP through 2006. Looking back over the 10 year period from 1997 to 2006 the seasonal drop in 1Q is huge and varies significantly from year to year. It typically plunges 10% on an unadjusted basis, requiring a huge upward adjustment of 14.9 to 21.1pp to correct the seasonal drop (Chart 1). Even a small error in this large and variable adjustment could create serious mismeasurement when we drill down to real GDP. The adjustment challenge for 1Q GDP is much higher than for other quarters and for other data. In the other three quarters of the year the seasonal adjustment lowers growth by about 5pp—or a third as much. And for payrolls the 1Q adjustment is only about half of that for GDP. Big adjustments create room for big errors.