Why negative US first quarter growth is not a trend

The US economy shrank in the first three months of the year, contracting by -0.4% in the first quarter, or -1.4% on an annualised basis, its weakest quarter since the early days of the pandemic.  This was significantly below the median estimate of 1.1% predicted by economists.  

The print shows the recovery has slowed massively from the 6.9% rate seen through the fourth quarter of last year.  The report was compiled as the war in Ukraine triggered oil price rises that are still working their way through the economy and before China imposed new coronavirus lockdowns that may worsen supply chain problems.

However, a closer analysis of the data provides hope that the country will not enter a technical recession following a second quarter of decline in activity.  In fact, despite inflation is running at a level not seen since 1980, Americans continued to consume, mainly in services.  That resulted in consumer spending contributing 1.8 points to first quarter GDP, an increase of 2.7% over the previous quarter.  On their part, businesses also continued to invest, contributing another 1.3 points to growth, or an increase of 7.3%.  The two main motors of growth have therefore remained solid.

This disappointing numbers released on April 28 by the Bureau of Economic Analysis can be explained by three somewhat more temporary factors.  First of all, we have seen a reduction in stocks held by companies which resulted in a negative contribution of 0.8%. The fourth quarter’s booming growth was led by a massive buildup as companies rushed to match supply with demand.  Since most of that stockpiling happened in the last months of 2021, businesses dramatically slowed down the inventory investment in the first quarter.

There was also a reduction in government spending which contributed to a drop of 0.5% and was due to the expiry of various stimulus plans.  That shows up as a negative on GDP but doesn’t’ signal a weakness in the economy.

Finally, and without a doubt, the most impactful, there was a surge in the US trade deficit which had a negative contribution of 3.2 points.  Economic activity rebounded faster in the US than in most other countries and Americans continued to spend at a record pace through February.  In fact, the US continued to import massively (up 17.7%) especially foreign automobiles.  Domestic production remained hampered by the shortage of microprocessors and companies resorted to foreign oil.  Exports, on the other hand, fell by 5.9% and were impacted by the crisis in Ukraine and the Omicron variant.  In fact, the pandemic affected foreign economies more than the US.

The bleak GDP reading isn’t set in stone.  In fact, the figure is expected to be revised multiple times in the coming months as more data comes in.  Still, the report signals, the booing expansion seen through 2021 won’t repeat itself.  Growth was expected to ease as stimulus effects waned and the country get closer to full health, but the data revealed the slowdown was much more severe than anticipated.  That did not stop the Federal Reserve from hiking rates by 50 basis points last week, as Chair Jerome Powell emphasized the strength of the US consumer and business community.

Another indication that the negative GDP figure should be a one-off, at least for now, is that the Atlanta Fed’s initial estimate of second-quarter GDP is +1.9% on an annual basis.  Moreover, the consensus of most economists ranges from a 1.7% to a 4.8% annual pace.  If the supply chain bottlenecks diminish in the current quarter, we should expect GDP growth to rebound back.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018. For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.