Gross domestic product fell in the first quarter, as businesses slowed their inventory buildups and exports declined. It is the first negative growth number for the U.S. economy since the spring of 2020 at the onset of the pandemic.
Driving the news: The economy contracted at a 1.4% annual rate in the first three months of the year, the Commerce Department said Thursday. That compares with 6.9% growth in the fourth quarter of 2021.
Yes, but: The details of the disappointing number were less alarming than the headline might suggest.
- Trade subtracted 3.2 percentage points from overall GDP growth, as exports fell sharply and imports soared. This reflects a U.S. economy with significantly stronger domestic demand than the rest of the world.
- Inventory adjustments subtracted 0.8 percentage points from the overall growth number. Businesses built up their inventories less rapidly than they had in the fourth quarter, which in the arithmetic of GDP amounts to a negative — but historically does not presage weaker growth going forward.
In the categories that speak to the underlying growth trend in the U.S. economy, particularly consumer and business spending, things looked significantly better — and more consistent with an economy that continues to power ahead through the first months of 2022.
- Personal consumption expenditures increased at a 2.7% rate. In a particularly positive sign, spending on goods was essentially flat while services spending rose sharply — a sign that the long-awaited post-pandemic pivot of the economy away from physical goods is underway.
- Business investment was up at a breakneck 9.2% rate, with particularly strong spending on equipment and intellectual property products. That suggests the corporate sector was still in expansion mode in the first quarter.
Still, the negative headline number gives a distinct whiff of stagflation — stagnant growth paired with high inflation — that is a political liability for President Biden and Democrats, especially if it were to repeat as the year progresses.
The bottom line: It appears that the extraordinary growth numbers of 2021, a result of the economy reopening from the pandemic, are a thing of the past. But the details of the GDP report suggest that underlying growth remains relatively strong, for now.
Editor’s note: This story has been corrected to state that personal consumption expenditures increased 2.7% during the first quarter (not 2.8%).
