The US economy just shrank. Here's why you shouldn't be worried.
- New data showed the US
economyshrinking in Q1 for the first time since the pandemic crash.
- Core parts of the economy, like consumer spending and business investment, actually had a strong quarter.
The US economy just contracted for the first time since the intense lockdowns of early 2020. But there's no reason to panic.
Despite that scary headline number, the details of the report and most other economic yardsticks show the recovery is trucking along just fine.
The economy isn't as dismal as headline GDP suggests
The headline contraction in
Other details in the GDP report back up the encouraging outlook, with consumers and businesses alike still spending big.
Americans' spending, which makes up about two-thirds of the overall economy, saw a 2.7% jump, suggesting that demand remains strong even in the face of high inflation. That was fueled by a 4.3% increase in spending on services, a welcome improvement after lockdowns and virus waves starved the sector of much-needed activity.
The uptick signals "consumers' wallets remained 'open for business'" despite high inflation, and spending growth is likely to pick up in the second quarter as more households indulge in travel and leisure, Greg Daco, chief economist at EY-Parthenon, said.
Business investment also picked up in the three-month period, providing another lift to overall output, suggesting that employers still see strong potential for future growth and are pouring money into expanding their operations.
Altogether, consumer spending, private investment, and the strength of the housing market added more to GDP in the first quarter than in the fourth, signaling the domestic economy actually accelerated through the start of 2022, Swonk said.
The headline number was dragged lower by temporary problems
For starters, a drop in business inventories put a huge damper on economic output. The final months of 2021 saw firms build up their stockpiles to counter the effects of lingering supply-chain issues. That rush played a major role in boosting growth through the end of 2021. But with the inventory build-up having played out, firms cut back on such investment in 2022.
That pullback alone subtracted 0.8 percentage points from the headline GDP rate, Jason Furman, a professor of economics at Harvard University and former chairman of President Obama's Council of Economic Advisors, tweeted.
Trade figures put an even bigger drag on the growth gauge. The first three months of the year saw imports remain high while exporting dropped to the weakest pace since the second quarter of 2020. Since imports count negatively toward GDP, the shift subtracted a full 3.2 percentage points from growth, according to Furman. Put differently, economic output would've handily exceeded forecasts if the trade deficit wasn't so large.
The fault only partially lies with the US. Part of the reason for such high imports comes down to Americans' voracious spending appetite.
On the other end of the trade equation, exports were mostly lower due to weaker demand abroad. The US has enjoyed a uniquely demand-strong recovery while other economies have generally seen high inflation have a bigger effect on spending. As such, demand for US goods and services overseas was subpar through the quarter.
While the economy is faring better than the GDP report suggests, it's unlikely the country repeats the stellar rebound seen through 2021. The US will likely experience slow growth later this year as inflation bites into spending and the Federal Reserve lifts interest rates, Matthew Sherwood, global economist at the Economist Intelligence Unit, said.
Still, the US is "in much better shape than the headline figure would imply," and it's unlikely the country enters a new recession "given the underlying health of the domestic economy," he added.
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