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U.S. GDP contracted by 1.6% in Q1

June 29, 2022 Blog 1 min read
Jim Baird Wealth Management
The third estimate of Q1 GDP was little changed, but a more significant slowdown in consumer spending growth confirms that households are feeling the effects of inflation and cutting back accordingly.

GDP QoQ (Annualized % Change) - History

The third estimate of Q1 GDP revealed that the U.S. economy contracted by 1.6% in the first quarter, a fractional erosion from the previous estimate. The pullback marked the first outright contraction in activity since the onset of the COVID-19 pandemic when much of the economy was shut down in mid-2020.

A sharp widening in the trade deficit was a significant headwind in Q1, as imports to the United States rose and exports declined, reflecting pandemic-related supply chain disruptions and slowing global demand for U.S. exports. The trade deficit has long been a headwind to domestic growth given heavy consumer demand for inexpensive foreign goods, but the drag in Q1 was particularly noteworthy. That alone shaved more than three percentage points off growth.

More concerning was the sharp downward revision to personal consumption, indicative of a more pronounced slowdown in consumer spending growth than was previously believed. Personal consumption spending growth was trimmed from 3.1 to 1.8% on the back of downward revisions in spending on durable goods and services. Spending on nondurable goods were unchanged at -3.7%.

Accounting for the largest portion of the U.S. economy, consumer spending is a critical pillar to growth. Surging inflation has been a dark cloud over the collective consumer mood and is becoming increasingly apparent in terms of their ability and willingness to increase their spending. Household income may be growing, but the savings rate has been in a steady decline over the past year.

Higher prices for the necessities — housing, food, and fuel — are increasingly crowding out other spending, particularly for lower income households. Despite some of the strongest wage gains in decades and a strong labor market, for many, those perceived gains are being more than wiped out by the corrosive effects of high inflation.

The bottom line? There was little new in today’s GDP report – mostly a reiteration of what was already known. Indications that consumer spending early this year had softened more than previously believed is noteworthy though, particularly given the indications that consumers may have retrenched further in recent months. The real-life challenge for Main Street is inflation. That’s the challenge for Fed policymakers as well, who are now faced with a difficult near-term path. Tightening will create additional near-term pain, but a failure to take aggressive steps to attack the inflation problem would create even greater challenges over the long term.

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