GDP fell by 1.4% on an annual basis in the first three months of the year
Contributed to the change in GDP in the first quarter of 2022
The companies sold surplus stocks from the end of 2021
Personal consumption increased GDP by 1.8 percentage points
Imports rose, declining GDP
Contributed to the change in GDP in the first quarter of 2022
The companies sold surplus stocks from the end of 2021
Personal consumption increased, increasing GDP
1.8 pp
Imports increased,
reduction of GDP
Contribution to the quarterly change in GDP in the first quarter of 2022
The companies sold off the surplus stocks purchased at the end of 2021.
Personal consumption increased in the first quarter of 2022, increasing GDP by 1.8 percentage points
Imports rose, declining GDP
Contribution to the quarterly change in GDP in the first quarter of 2022
The companies sold off the surplus stocks purchased at the end of 2021.
Personal consumption increased in the first quarter of 2022, increasing GDP by 1.8 percentage points
Imports increased,
reduction of GDP
-1.4% overall
change in GDP
The US economy contracted at an annual rate of 1.4 percent in the first three months of the year, with the first such decline returning to the end of the pandemic in 2020. The sharp reversal, after more than a year of rapid growth, has politicians, economists, businesses and families trying to make sense of how the economy is doing and what the latest GDP report tells us about where we are going from here.
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Here are some ways to think of data on economic growth against the background of high inflation, a tight labor market and uncertainty about a possible recession that may be in the future.
What is behind the figure of 1.4%?
To sum up, the US economy contracted sharply at the start of the pandemic, followed by a boomerang in 2021. Last year, the economy grew by 5.7 percent, the fastest decline of the year since 1984.
Economists did not expect the economy to maintain the same momentum this year as federal stimulus programs weakened and the Federal Reserve began raising interest rates to slow growth and cope with rising prices. But the negative gross domestic product data was still a surprise and masked some signs of strength, such as consumer spending.
The contraction raises fears that a recession – defined as two consecutive quarters of negative growth – could be on the horizon as the Fed expects up to seven interest rate hikes this year. But economists do not draw a straight line between this GDP report and the increased risk of recession. If the economy shrinks later this year, it could be for a variety of reasons, such as raising the Fed’s interest rates too aggressively or cutting spending, economists say.
The White House is trying to adapt to the changing economy
“My big question now is, ‘When will they start delaying their pocketbooks?’ But that’s not because of this report,” said Beth Ann Bovino, chief US economist at S&P Global Ratings. “In the future, will there be a time when people either run out of buffer, start to feel like they’re drowning too much in their savings, or are tired of paying higher prices?”
Dropping out when buying inventory
One of the main reasons for the economic downturn in the first quarter was rooted in so-called purchases of inventory by retailers, which are goods that companies tend to buy before they need them. Retailers often make purchases far in advance to prepare for things like the holiday shopping season. And in some cases, companies will stock up on materials if they are worried about supply chain delays or other problems such as rising prices. This is exactly what happened at the end of 2021. Do you remember all that crap in the supply chain? Retailers brought in a lot of goods early to make sure there was no shortage during the holidays.
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In early 2022, many of these same companies realized that they had an abundance of sweaters, toys or gadgets and no need to stock up anymore. Stock purchases alone are responsible for much of the decline in GDP – up to 0.84 percentage points.
More imports weigh on GDP
The United States did not export as many goods in the first three months of the year. On top of that, the country has imported much more, in part because of all the various supply chain problems that have plagued companies over the past year, even with high consumer demand. This move increased the trade deficit.
And increased trade deficits play a big role in the way GDP is calculated. The GDP report removes virtually all items purchased from other countries, which is a major obstacle to GDP. In fact, the decrease in exports and the increase in imports, taken together, are responsible for the drop of 3.2 percentage points.
“Demand for goods is so strong that Americans are turning to the international economy to meet demand,” said Joe Bruswell, chief economist at RSM. “There was an increase in demand for goods and that’s where, in short, the problem is.”
International trade data also tends to receive serious revisions after initial estimates of GDP. More specific data will be released next week. So far, however, “the inside of the equation has been strong,” Bovino said.
The other main forces in the economy
The GDP report comes as politicians and economists grapple with two major problems in the economy: rising inflation and a tight labor market.
Inflation rose to its highest level in 40 years, with prices rising 8.5 percent in March from a year earlier. The Fed is vying to gain control of rising prices before they become even more embedded in the economy. Republicans blame the Fed for being too slow to respond, and blame much on Democrats’ efforts last year.
Meanwhile, the labor market has shown tremendous strength since 20 million jobs fell out of the economy two years ago. The unemployment rate remains remarkably low – 3.6 percent – and the labor market was a huge topic of conversation for the Biden administration. But economists and politicians are also worried that the labor market is unsustainably hot. There are many more jobs than job seekers, and the mismatch is causing the Fed to try to reduce the demand for workers without making people lose their jobs.
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