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Fresh Warnings In The Government's First-Quarter Economic Report

There was a lot of news in the GDP report yesterday, in addition to the data from the day’s other releases. It took a little while to percolate, but here are my five major items:

1) GDP growth is worse than it looks;

2) Consumption is unbalanced and weak;

3) Inflation is worse than it looks;

4) The factory construction boom is going into reverse; and

5) There is no evidence of an AI productivity boom. (Our jobs are safe!)

I’ll deal with these in turn.

GDP Growth Was Driven by a Jump in Federal Government Spending

Spending by the federal government fell at a 16.6 percent annual rate in the fourth quarter of 2025. This was partly driven by the DOGE layoffs, most of which first took effect in the fourth quarter. However, it was also partly driven by the government shutdown at the start of the quarter, which continued until the middle of November. The contraction from the DOGE cuts is not being reversed, but the contraction from the shutdown was reversed. This explains the 9.3 percent growth in federal spending, which added 0.56 percentage points (PP) to growth for the quarter.

Pulling out federal spending, GDP growth was around 1.5 percent. That’s not disastrous, but not something to write home about.

It is common for economists to look at the growth in final sales to domestic producers as a sort of “core” GDP. This strips out the growth (or shrinkage) from inventories and net exports.

This is an especially bad approach to the first quarter data. The big jump in federal spending gets counted in the core even though absolutely no one expects it to continue. (Actually, the Iran War may sustain growth in spending, but that is a bit out of the ordinary.) In the fourth quarter, the reduction in federal government spending reduced the growth rate by 1.16 PP, which was the main reason for the weak 0.5 percent growth rate reported for the quarter. The move to a core measure would not have changed that picture.

The other problem with the core measure is that the imports it strips out directly contribute to the investment growth it counts. Computer investment rose at a 64.7 percent annual rate, while investment in software increased at a 22.6 percent rate, contributing 0.58 PP and 0.51 PP, respectively, to the quarter’s growth. This is the data center boom.

However, many of the items being picked up by this growth are imported. If there is a comparable rise in investment in the second quarter, there will be a comparable increase in the trade deficit. It doesn’t make sense to count the positive but not the negative. The direct effect of imports is to grow other countries’ economies, not ours. (Yes, the indirect effect is positive, but that’s not the question here.)

Consumption Growth Was Driven by Healthcare Spending

Consumption grew at a 1.6 percent annual rate in the quarter, which is fine, even if on the slow side. But the troubling part is the composition. Healthcare spending accounted for 47 percent of the increase in consumption, while financial services accounted for another 24 percent, leaving less than 30 percent for everything else.

Durable goods consumption was barely positive. It was only kept above zero by a surge in March car purchases, possibly by people trying to get ahead of price increases. Non-durable goods consumption actually fell slightly.

The pattern here is that most areas where consumption might be seen as discretionary, like recreational vehicles, hotels, and restaurants, had declines in real spending. That is not a good story.

The Jump in Inflation was Not Just Driven by the War

We all know that the shutting of the Strait of Hormuz sent oil and gas prices soaring. This is a big factor in first quarter inflation, but far from the whole story.

Inflation was picking up even before the start of the war. The PCE deflator rose 0.3 percent in January and 0.4 percent in February. The core deflator rose 0.4 percent in both months. This pace is far above the Fed’s 2.0 percenttarget. March was considerably worse, with the overall rate rising 0.7 percent for the month. The annual rate for the quarter as a whole was 4.5 percent, the highest since the third quarter of 2022.

If the war ends quickly and the Strait is reopened, oil and gas prices will head back down, but according to the analyses I have seen, it will take much longer going down than going up. And many of the negative effects from the closing, like the shortage of fertilizer for planting, won’t be seen for months down the road.

It is also important to note that the data center boom is causing considerable inflation in other areas. The annual rate of inflation in computers and related equipment was 18.5 percent in the first quarter. This is likely to increase if the AI bubble continues to grow.

Factory Construction is Going Down Fast

There was an unprecedented boom in factory construction in the recovery from the pandemic. At its peak in 2024, real construction was going on at more than twice the pre-pandemic pace.

This has gone in reverse, and the decline is accelerating. Factory construction fell at a 22.7 percent rate in the quarter and is now down 21.7 percent from its peak in the third quarter of 2024. At the first quarter pace, we will be back to the pre-pandemic rate of factory construction in a year and a half.

No Evidence of an AI-Driven Productivity Boom

While the media are filled with stories about AI taking all the jobs, the data apparently have not gotten the message yet. Value-added in the non-farm business sector, where productivity is best measured, grew at a 1.5 percent annual rate. It looks as though hours will be close to flat for the quarter, although data revisions could change this story.

That would imply a 1.5 percent rate of productivity growth. That’s not a bad rate, but it’s down some from last year’s 2.5 percent. Everyone should know that the quarterly productivity data are highly erratic and subject to large revisions, but it’s safe to say that AI does not seem to be taking all the jobs just yet. Maybe we will have a different story next quarter.

War Is the Big Uncertainty

The economy was not looking great going into the war. To be clear, we were not looking at a recession or runaway inflation, but we were seeing weak growth, modest real wage growth, and at least moderately accelerating inflation. The war is making the inflation picture worse, and the longer it goes on, the worse the picture gets.

The additional military spending will provide a boost to growth, but it is not the sort of boost that anyone would want, other than military contractors. A quick peace deal will lessen the damage but will not make it all go away.

Dean Baker is a senior economist at the Center for Economic and Policy Research and the author of the 2016 book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Please consider subscribing to his Substack.

Republicans Push Skimpy, Unaffordable Health Coverage As Costs Keep Rising

The median cost of employer-based health insurance this year leaped ahead at nearly twice the rate of the consumer price index, according to the annual Kaiser Family Foundation employer survey released yesterday. Sadly, workers are bearing a larger share of the increased burden through rapidly rising co-premiums.

The press coverage this morning of the closely followed survey emphasized the combined top-line increase of 5.5 percent for a family plan, which now stands at a staggering $26,993 a year or about the price of a new compact car. The cost of an employer-based individual plan rose at the slightly lower rate of 4.6 percent to $9,325 a year.

But a deeper dive into the numbers provides a better understanding of why people are so upset about rising health care costs. Employee co-premiums for a family plan (the amount deducted from paychecks) rose 7.6 percent on average to $6,850. The employer share went up only 4.8 percent. The net effect was a downward shift in the share paid by employers and a corresponding upward shift in the share paid by their employees, which was a half percentage point more or 25.4 percent of the total.

This increased burden on workers comes after an eight-year period when the employer share of premiums rose fairly steadily (with a few years off early in the pandemic). Companies offset some of those increases by funneling more of their workers into plans that raised their out-of-pocket expenses for deductibles and co-pays.

Depending on the plan type (HMO, PPO, high-deductible), the average deductible from employer-based family plans now ranges from $3,118 to $5,095 a year. Fully a third of workers and their families enrolled in high-deductible plans for 2025, up from 28 percent the previous year and the most ever.

Put the two together, and the median family (half pay more, half pay less) now pays anywhere from $9,968 to $11,945 a year for health care or close to $1,000 a month. Given the median household income in 2024 stood at $83,730, that translates into anywhere from 12 percent to 14 percent of a typical family’s income.

Things are about to get a lot worse. Next year’s premiums and co-premiums for employer-based plans, which cover an estimated 154 million people, are set to rise six percent to seven percent, according to a new survey by Mercer, a health care benefits consulting firm. If the split between employers and their employees remains the same, that will exceed wage increases by two to three percentage points. Wage increases have been trending down for the past three years, falling to just 4.1 percent this past August, the last month reported by the Bureau of Labor Statistics before the government shutdown.

Source: Atlanta Federal Reserve

No wonder health care costs now ranks as the second most important issue for inflation-weary Americans, just behind the deteriorating state of the overall economy. More than four in five of 1,300 adults surveyed in mid-October by the Associated Press and the NORC Center for Public Affairs said health care issues were extremely or very important to them personally. That was nine percentage points more than crime and 23 percentage points ahead of immigration — the next two biggest concerns.

The impact of ACA/Medicaid cuts on employer plans

The outlook for employer-based plans will also get a lot worse if Democrats fail to restore the Medicaid cuts and the enhanced subsidies for Affordable Care Act plans (which provides affordable insurance for tens of millions of low-wage workers, gig workers and sole proprietors). An estimated 7.3 million people who purchased subsidized exchange plans will drop ACA coverage, with more than half becoming uninsured, according to a Commonwealth Fund brief.

Many will look for cheaper, non-ACA compliant plans that don’t quality for listing on the exchanges because they provide skimpier benefits, are not required to provide free preventive care, can discriminate based on prior medical conditions, and often carry extremely high deductibles and co-pays. This summer, the Trump administration announced it wouldn’t enforce the rule approved by the Biden administration in mid-2024 that limited such plans to three months duration.

“Those who sell non-ACA plans … will absolutely see the coming open enrollment as an opportunity to push their plans as more affordable alternatives, without sharing full information with consumers about the limits of those plans,” said JoAnn Volk, a professor at Georgetown University’s Center on Health Insurance Reforms.

What happens when people who previously had Obamacare buy skimpy plans or become uninsured? They postpone care until their conditions require emergency room treatment — the most expensive place to obtain health care. When struck by serious illnesses like cancer, heart attacks and strokes, they often fail to pay their uncovered bills, or resort to Go Fund Me campaigns to pay off their high deductibles. Some will negotiate long-payoff periods and live the rest of their lives burdened by medical debt. Some will declare bankruptcy.

Hospitals and physicians, in turn, will raise their prices to cover the cost of uncompensated care, which will cause private insurance rates to rise even more. Rising prices, rising insurance premiums, and rising uninsured rates is an accurate description of what existed in the U.S. before passage of the ACA.

These health care economic fundamentals are of little interest to the modern-day Republican Party, which invariably includes some variation of bare-bones insurance as one of their answers to the affordability crisis. Early in the shutdown, they floated ideas like instituting new income caps on Obamacare subsidies, establishing minimum co-pays, and cutting off subsidies for new enrollees, none of which they would agree to negotiate until the government is reopened.

Then, last week, Politico reported they are also willing to beef up tax credits for investing in health savings accounts, which could be used to buy skimpy plans. Lower-income workers generally avoid HSAs since they can’t afford the voluntary deductions needed to fund them.

I can’t predict when or how the shutdown crisis will end. But I am pretty confident that I know what will happen to health care costs in the next few years given Republican control of Washington. They’re going up, up, and up.

Merrill Goozner, the former editor of Modern Healthcare, writes about health care and politics at GoozNews.substack.com, where this column first appeared. Please consider subscribing to support his work.

Reprinted with permission from Gooz News

GOP 'Glory Days'? The Insurance Market Before Obamacare Was A Nightmare

The Republicans seem to hope that most people have no knowledge or memory of the insurance market before Obama pushed the Affordable Care Act (ACA) through Congress. Most people would probably not like to go back there.

The big problem with the pre-ACA insurance market is that insurers don’t like to insure people with health issues. This might be too complicated for a Republican politician, but it is pretty straightforward to ordinary people.

Most people are reasonably healthy. For that reason, insurers are happy to cover them. From the standpoint of an insurer, covering a healthy person just means that someone is sending you a check every month. It’s a good deal, if you can get it.

But covering people with serious health issues is a totally different ball game. These people actually cost insurers money. They have to pay for doctors’ and hospital bills, drugs, therapy, and all sorts of other expenses.

Since insurers are much smarter than Republican politicians pretend to be, they could avoid paying the bills for people with serious health conditions by just refusing to insure them in the first place. If someone had a history of cancer or heart disease, insurers could just refuse to offer them coverage. People with health problems are money losers for insurers, they want to cover the people who just send them checks.

Some states put restrictions on insurers’ ability to reject people for pre-existing conditions. The response in that case was to simply charge people with health issues a much higher premium. That meant that a cancer survivor or person with heart disease might pay a premium three or four times as high as a person in generally good health. This would make the policy unaffordable for most people with health issues.

Even if they do end up paying the bill, the insurer will have limited their losses by collecting high premiums. And, who knows, not all cancer survivors have recurrences, maybe the insurer can just put those higher premiums in the bank.

Then there was also the trick of rescission. This meant that an insurer would go over the health forms that people were required to submit before getting insurance, to see if there was some basis for cancelling the policy. This could mean, for example, that an insurer could cancel the policy of a cancer patient because they had failed to list a visit to the hospital on an insurance form. As a result, instead of getting stuck with tens or hundreds of thousands of dollars of bills, the insurer could stick the patient with it by claiming they lied when they took out the policy.

This is what the Republicans are telling us was the golden age of the health insurance industry, that was ruined by Obamacare. Obamacare required that insurers issue policies to people without regard to their health and also required that everyone within an age group pay the same premium.

Remarkably, after the passage of Obamacare, healthcare cost growth slowed sharply. This is the exact opposite of what the Republicans are running around saying.

In the decade before Obamacare passed, from 2000-2010, healthcare costs increased 4.0 percentage points as a share of GDP — the equivalent of more than $1.2 trillion in today’s economy. By contrast, in the 15 years since its passage, health care costs have increased by just 1.4 percentage points. If healthcare costs had continued to increase at the pre-ACA rate, we would be spending another $1.4 trillion year, $11,000 per household, on healthcare.

This doesn’t mean our current healthcare system is great. It is very far from it. Insurers still have an enormous incentive to deny claims and refuse needed treatment. Their abuses can be restrained with serious regulation, but we know the Trump administration doesn’t like any regulations that limit corporate profits, so look for much worse insurer abuses in the years ahead. In a sane world, we would have something like the Canadian universal Medicare system and save hundreds of billions a year on insurance costs.

We also pay way too much for drugs and medical equipment. Drugs are almost invariably cheap to manufacture and distribute. It is government-granted patent monopolies that make them expensive. That is absurdity of the tragic choices many people are forced to make when they have to struggle to find tens or hundreds of thousands of dollars to pay for a life-saving drug. The drug is actually cheap; we just make it expensive with patents. If drug research and development were financed through direct public funding, as we already do to a substantial extent with the National Institutes of Health, no one would have to struggle to pay for the drugs they need.

I won’t give the full sales pitch for Medicare for all here, I just want to make the point that saving Obamacare should not be the final goal. But the key point is that Republicans are pushing total nonsense in arguing that the pre-ACA insurance market was something anyone in their right mind would want to see again. For my part, when it comes to glory days, I’ll stick with the Boss.

Reprinted with permission from Dean Baker.

Vance Invents A Racist Anti-Migrant Myth To Defend GOP Shutdown

Vice President JD Vance defended the GOP’s government shutdown on Wednesday by falsely claiming the Democratic Party is trying to give federal health care benefits to undocumented immigrants.

"If you're an American citizen [and] you've been to a hospital in the last few years, you probably noticed that wait times are especially large, and very often somebody who's there in the emergency room waiting is an illegal alien—very often a person who can't even speak English,” Vance said. “Why do those people get health care benefits at hospitals paid for by American citizens?”

As ABC News notes, undocumented immigrants are not eligible for federally funded health insurance programs.

Like many of his GOP colleagues, Vance’s only defense for the party’s failed policies is racist scapegoating. While the Trump administration threatens Americans with economic suffering, their supposed solutions amount to little more than blaming immigrants and marginalized groups for the consequences of their own policies.

The Republican playbook is simple: Lie, repeat the lie, and lie again.

Reprinted with permission from Daily Kos.

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