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Q1 GDP declined by 1.5%, but consumer spending remained strong

May 26, 2022 Blog 2 min read
Jim Baird Wealth Management
A headline-busy first quarter of 2022 weighed on economic output, but strong consumer spending growth indicates that the economy is in a better position than the top-line decline suggests.

GDP QoQ (Annualized % Change) - History

Revised modestly lower from the initial reading, the economy contracted at a 1.5% annualized pace in the first quarter of 2022, broadly reaffirming that the overall pace of output slumped in the year’s first few months. That represented the lowest reading on GDP since the bottom fell out in the second quarter of 2020 as the initial COVID-19 outbreak in the United States shut down much of the economy. Even so, the outlook today isn’t as poor as the headline number would suggest, and concerns about a near-term recession may be overblown.

The disruptive effects of the pandemic are still readily apparent as the global economy attempts to revert to a sense of normalcy. The production and flow of goods remains challenged, although not universally so, and consumer spending patterns continue to adjust to evolving conditions.

The positive? Personal consumption grew at a 3.1% annual pace in Q1, having accelerated for the past few quarters on the back of improved spending on durable goods in particular. Much of that surge may be traced to the improvement in the availability of some goods that had been in short supply at times since 2020. Spending on services also grew at a solid 4.8% clip.

The story isn’t one of universally stronger household spending though, as spending on nondurable goods stumbled. That’s not a reflection of consumer weakness but of a shift in spending priorities that reflects both an increase in mobility and some normalization in spending following a six-month spending binge on nondurable goods last year.

As the largest driver of the U.S. economy, an acceleration in consumer spending provides reason for optimism that the underlying momentum in the economy remains positive.

The negative? A sharp reversal in inventories, which juiced Q4 2021 GDP numbers was a headwind in Q1, trimming top-line growth by 1.1%. Net exports also weighed heavily as demand for U.S. exports slowed sharply.

Household spending remains a key foundation underpinning the economy, and a strong labor market is a critically important pillar supporting consumers. Despite some slowdown in economic growth, labor market conditions are still tight. Employers are facing one of the toughest hiring environments in memory and are understandably slow to trim payrolls.

First-time jobless claims dipped modestly last week to 210,000 from a revised 218,000 in the prior week, confirming that there are few signs of softening in labor markets. That’s good news for workers and those looking for work and should continue to support solid wage growth and consumer spending, although elevated inflation is a headwind to stronger spending in real terms. For lower income households in particular, surging prices are forcing tougher decisions around discretionary spending that are likely to persist for some time still.

The bottom line? The downturn in headline GDP in Q1 clearly illustrates that the economy remains impacted by pandemic-related disruptions, the global policies aimed at addressing the health risk, and the diminishing effects of massive fiscal and monetary stimulus aimed at keeping the economy afloat. Normalization of inventories and global trade flows will take time, but stronger consumer spending growth provides reason for optimism that the near-term outlook is not as bad as the negative GDP print suggests.

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