Weak Headline Masks Underlying Resilience in First Quarter GDP


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Real gross domestic product fell at a 1.4 percent annualized rate in the first quarter versus a 6.9 percent rate of gain in the fourth quarter. Over the past four quarters, real gross domestic product is up 3.6 percent, putting the level almost exactly on trend (see first chart).

Real final sales to private domestic purchasers, a key measure of private domestic demand, rose at a more robust 3.7 percent annualized rate in the first quarter following a 2.6 percent pace in the fourth quarter. Over the last four quarters, real final sales to private domestic purchasers are up 4.4 percent, keeping the level slightly above trend (see first chart). The trend growth in real final sales to private domestic purchasers is 2.6 percent since mid-2009.

Among the components, real consumer spending overall rose at a 2.7 percent annualized rate, beating the 2.5 percent rate in the fourth quarter, and contributing a total of 1.83 percentage points to real GDP. Consumer services led the growth in overall consumer spending, posting a 4.3 percent annualized rate, adding 1.86 percentage points to total growth while durable-goods spending rose at a 4.1 percent pace, contributing 0.35 percentage points. However, nondurable-goods spending fell at a -2.5 percent pace, subtracting 0.38 percentage points and (see second and third charts). Within consumer services, growth was broadly strong, led by financial services (6.3 percent growth rate), recreation (5.5 percent), and food services and accommodation (5.0 percent).

Business fixed investment increased at a 9.2 percent annualized rate in the first quarter of 2022, contributing 1.17 percentage points to final growth. That gain was led by a 15.4 percent jump in business equipment investment (adding 0.79 percentage points) while intellectual-property investment rose at an 8.1 percent pace (adding 0.40 points to growth). Those gains were partially offset by a decline in spending on business structures where spending fell at a 0.9 percent rate, the fourth decline in a row, and subtracting 0.02 percentage points from final growth.

Residential investment, or housing, rose at a 2.1 percent annual rate in the first quarter compared to a 2.2 annualized gain in the prior quarter. The first quarter was the second gain in a row following drops in the second and third quarters of 2021. The gain in the first quarter added 0.10 percentage points (see second and third charts).

Businesses added to inventory at a $158.7 billion annual rate (in real terms) in the first quarter versus accumulation at a $193.2 billion rate in the first quarter. The slower accumulation reduced first-quarter growth by 0.84 percentage points (see fourth chart). The inventory accumulation helped boost the real nonfarm inventory to real final sales of goods and structures ratio to 4.00 from 3.87 in the fourth quarter; the ratio hit a low of 3.75 in the second quarter.  This is still below the 4.3 average for the 16 years through 2019 (see fourth chart).

Exports fell at a 5.9 percent pace while imports rose at a 17.7 percent rate. Since imports count as a negative in the calculation of gross domestic product, a gain in imports is a negative for GDP growth, subtracting 2.53 percentage points. The fall in exports subtracted 0.68 percentage points. Net trade, as used in the calculation of gross domestic product, subtracted 3.2 percentage points from overall growth.

Government spending fell at a 2.7 percent annualized rate in the first quarter compared to a 2.6 percent pace of decline in the fourth quarter, subtracting 0.48 percentage points from growth.

Consumer price measures showed another sharp rise in the first quarter. The personal-consumption price index rose at a 7.0 percent annualized rate, up from a 6.4 percent pace in the fourth quarter. From a year ago, the index is up 6.3 percent. Excluding the volatile food and energy categories, the core PCE (personal consumption expenditures) index rose at a 5.2 percent pace versus a 5.0 percent increase in the fourth quarter. From a year ago, the core PCE index is up 5.2 percent.

Lingering materials shortages, labor constraints, and logistical problems are sustaining upward pressure on prices. Upward price pressures have resulted in a new cycle of Fed policy tightening, raising the risk of a policy mistake. Furthermore, geopolitical turmoil surrounding the Russian invasion of Ukraine has had a dramatic impact on capital and commodity markets, launching a new wave of potential disruptions to businesses. 

The outlook is for continued economic growth, but risks remain elevated. Additionally, 2022 is a Congressional election year. Intensely bitter partisanship and a deeply divided populace could lead to turmoil as confidence in election results are coming under constant attack. Contested results around the country could lead to additional economic disruptions and government paralysis, again testing the durability of democracy and the union itself. Caution is warranted.



* This article was originally published here

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