First Quarter ’22 GDP and Weekly Jobless Claims

KEY DATA:  GDP: -1.4%; Consumption: +2.7%; Nonresidential Investment: +9.2%; Federal Government: -5.9%; Trade Deficit: $191.6 bil. wider; GDP Prices: +8%; Consumer Prices: +7%/ Claims: -5,000

IN A NUTSHELL: “The headline is misleading; the economy is not falling apart.”

WHAT IT MEANS:  The economy contracted in the first quarter of this year.  Okay now that I got that out of the way, let’s look at the details, which were actually pretty decent.  Consumer spending grew at a moderate pace, despite having to pay an awful lot more for everything.  Corporations invested heavily, especially in equipment and intellectual property.  The two key sectors, households and businesses, more than held their own. So, why did the economy decline?  The answer, my friend, is in the trade data.  There was a surge in imports, as the supply chain problems slowly unwound, and firms continued the process of rebuilding inventories.  The biggest reason growth fell was that the trade deficit skyrocketed, reducing growth by a whopping 3.2 percentage points.  Imports were up nearly 18%, but exports fell.  The U.S. economy remains the strongest in the industrialized world and to feed the machine, we buy lots of goods from around the world.  That is an outflow of income and therefore drags down growth. In addition, the federal government cut back its spending sharply.  Fiscal responsibility is a nice idea, but it does come with a cost: Declining government spending slows growth, in this case by 0.5 percentage point.  But even here, the signs are not necessarily negative.  With the U.S. bearing the largest burden of supplying Ukraine and other countries affected by the Russian invasion with military and humanitarian aid, we should see a major increase in government spending in future quarter numbers.  Finally, companies rebuilt their inventories at an awesome pace.  Unfortunately, it was slower than what occurred at the end of 2021, so inventories took out almost one percentage points from growth.

If you think the economy is faltering, look at the labor market data.  Jobless claims fell last week and the level is extraordinarily low.  With job openings extraordinarily high, look for hiring to remain firm, though slower than it had been, and the unemployment rate near fifty-year lows. 

IMPLICATIONS:The economy did not falter in the first quarter.  But there were some warning signs in the details.  Most concerning is that disposable income, when adjusted for inflation, dropped solidly.There are few signs that inflation will moderate rapidly, so consumer spending power may continue to decrease.  That is not a positive trend for consumption.  With inventories largely rebuilt, the second quarter could be negatively affected by a modest inventory growth.  The housing market is being battered by high prices and rising mortgage rates, which could lead to a slowing in residential construction later this year.  So, there are some negatives to keep an eye on.  However, even though war is good for absolutely nothing, we are involved in the Russia/Ukraine war for the long haul, so government spending is going to surge.  Taken together, the economy should continue to expand, but with the Russian invasion affecting energy and food prices, inflation is also likely to remain elevated for an extended period.  It’s an insane world out there.  Be safe.