The US economy unexpectedly shrunk in Q1 2022, amid a resurgence in the pace of corona infections and a decline in government financial aid related to the pandemic. But the drop in production paints a misleading picture of the economy amid strong domestic demand.
The US Commerce Department said in its advance estimates of GDP that it fell at an annual rate of 1.4 percent in the last quarter. This is the first decline since the recession that followed the first shock of the pandemic nearly two years ago, and a sudden reversal of an economy that is off its best performance since 1984.
This sudden development came a result of the impact of hyperinflation exacerbated by the war in Ukraine and ongoing supply chain challenges.
While one quarter isn’t enough to create a growth trend yet, it is a warning sign of how a recovery might happen: two consecutive quarters of declining growth is a common definition of stagnation.
It was a marked slowdown from the pace of growth recorded in the fourth quarter of last year (6.9 percent), and the worst performance since the pandemic recession in the second quarter of 2020. It is less than economists’ expectations for a 1.1 percent gain.
But Ian Shepherdson, chief economist at Pantheon Macroeconomics, described the numbers as “noise. No signal. The economy is not falling into a recession.”
“Net trade deficitwas affected by a boom in imports, especially of consumer goods, as wholesalers and retailers sought to rebuild inventories. This cannot continue for much longer, as imports will decline in time, and net trade will boost GDP growth in the Q2 or Q3,” he added.
In a separate report, the Ministry of Labor reported on the increasing strength of labor market conditions. It showed that first-time applications for state unemployment benefits fell 5,000 to an annual pace of 180,000 after adjusting for seasonal factors for the week ending April 23.
Biden: The US economy is resilient
Despite the low numbers, President Joe Biden rated the US economy as “resilient in the face of historic challenges.”
“While last quarter’s growth estimates were affected by technical factors, the US faces the challenges of COVID-19 worldwide, Putin’s unjustified invasion of Ukraine, and global inflation from a position of strength,” a statement said.
US Commerce Department
“The decline in GDP reflects a decline in private investment, exports (…) and public expenditures of federal and local governments, while imports increased, which are deducted from GDP,” the US Department of Commerce said in a statement.
What led to the decline?
Much of the decline in the first quarter in the US was due to lower inventory investment, which was booming in the final months of 2021.
Inventory investment is the difference between goods produced (production) and goods sold (sales) in a given year.
“This means lower GDP should be taken into account,” warned Ryan Sweet, Moody’s Analytics senior director of economic research, before the data is released.
Exports and government spending also declined, while imports rose. Consumer spending, which is vital to the economy, increased as prices continued to rise. Americans spent more on services, led by healthcare. This offset a slight decrease in spending on goods, which was reduced due to lower spending on gas.
Gas prices have also skyrocketed in response to the Russian war in Ukraine, which has shaken energy markets around the world.
The price index, which tracks personal consumption expenditures, rose 7 percent in the first three months of the year, or 5.2 percent when energy and food prices are excluded.
What does this mean for the Federal Reserve?
The unexpected drop in GDP is likely not to change the immediate monetary policy outlook of the Federal Reserve.
In other words, the central bank is expected to raise interest rates next week. This will be the second price increase this year.
The vast majority of market participants expect an increase of half a percentage point, compared to the quarter point increase announced in March.
Earlier this month, Federal Reserve Chairman Jerome Powell said that a further rate hike is on the table for the May meeting.
