Why the US economy has contracted

Why the US economy has contracted

Why the US economy has contracted

GDP fell at an annualized rate of 1.4% in the first three months of the year


Contributors to the change in GDP in Q1 2022

Companies sold surplus inventory from the end of 2021

Personal consumption boosts GDP by 1.8 ppt

Imports increased, leading to a decline in GDP

Contributors to the change in GDP in Q1 2022

Companies sold surplus inventory from the end of 2021

Personal consumption increased, pushing GDP up by

1.8 points

Imports grown up,

bring down the GDP

Contributions to the quarterly change in GDP in Q1 2022

Companies sold surplus inventory bought at the end of 2021.

Personal consumption increased in the first quarter of 2022, pushing GDP up by 1.8 percentage points

Imports increased, leading to a decline in GDP

Contributions to the quarterly change in GDP in Q1 2022

Companies sold surplus inventory bought at the end of 2021.

Personal consumption increased in the first quarter of 2022, pushing GDP up by 1.8 percentage points

Imports grown up,

bring down the GDP

-1.4% globally

change in GDP

The U.S. economy contracted at an annualized rate of 1.4% in the first three months of the year, with the first such decline dating back to the pandemic shutdowns of 2020. The sharp reversal, after more than a year of rapid growth has prompted policymakers, economists, businesses and families trying to figure out how the economy is doing and what the latest GDP report tells us about where we go from here.

Five charts explaining why inflation is at its highest level in 40 years

Here are some ways to think about economic growth data, in the context of high inflation, a tight labor market and uncertainty about a possible recession that could occur in the future.

What’s behind the 1.4% figure?

To recap, the US economy contracted sharply at the start of the pandemic, then boomed in 2021. Last year, the economy grew 5.7%, the fastest annual clip since 1984 .

Economists did not expect the economy to maintain the same momentum this year, as federal stimulus programs waned and the Federal Reserve decided to raise interest rates to slow growth and control the rise in prices. But the negative gross domestic product data still surprised and masked some signs of strength, such as consumer spending.

The contraction has fueled fears that a recession – defined as two consecutive quarters of negative growth – is looming on the horizon, as the Fed plans up to seven rate hikes this year. But economists are not drawing a straight line between this GDP report and an increased risk of recession. If the economy contracts later this year, it could be for a variety of reasons, such as the Fed raising interest rates too aggressively or cutting spending, economists say.

The White House tries to adapt to the changing economy

“My big question going forward is, ‘When will they start slowing down their portfolios? But it’s not because of this report,” said Beth Ann Bovino, chief U.S. economist for S&P Global Ratings. “In the future, will there be a time when people run out of reserves, start to feel like they’re dipping too far into their savings, or get tired of paying higher prices?”

Drop in inventory purchases

One of the main reasons for the fall in the economy in the first quarter was due to what is called retail inventory purchases, which are the goods that businesses tend to buy before they go. need. Retailers often shop well in advance, to prepare for things like the holiday shopping season. And in some cases, companies are sourcing materials if they’re worried about supply chain delays or other issues, like rising prices. This is what happened at the end of 2021. Remember all those supply chain snafus? Retailers brought in plenty of merchandise early to ensure there were no shortages during the holidays.

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At the start of 2022, many of these same businesses realized that they had a lot of sweaters, toys or gadgets left over and no longer needed to stock up. Inventory purchases alone were responsible for much of the decline in GDP – up to 0.84 percentage points.

More imports weigh on GDP

The United States did not export as many goods in the first three months of the year. On top of that, the country has been importing a lot more stuff, in part because of all the various supply chain issues that have beset businesses over the past year, even in the face of strong consumer demand. This decision widened the trade deficit.

And expanded trade deficits play an important role in calculating GDP. The GDP report effectively subtracts all products purchased from other countries, which appears to be a major drag on GDP. In fact, lower exports and higher imports, taken together, were responsible for 3.2 percentage points of the decline.

“The demand for goods is so strong that Americans are looking to the international economy to meet demand,” said Joe Brusuelas, chief economist at RSM. “There has been an increase in demand for goods, and that, in a nutshell, is the problem.”

International trade figures also tend to undergo serious revisions after the initial GDP estimates. More precise data will be published next week. For now, however, “the national side of the equation was strong,” Bovino said.

The other major forces of the economy

The GDP report comes as policymakers and economists grapple with two major problems in the economy: soaring inflation and a tight labor market.

Inflation hit its highest level in 40 years, with prices rising 8.5% in March from a year earlier. The Fed is rushing to control rising prices before they embed themselves even further into the economy. Republicans blame the Fed for being too slow to respond and blame much of the Democrats’ sprawling stimulus efforts last year.

Meanwhile, the labor market has shown tremendous strength since 20 million jobs disappeared from the economy two years ago. The unemployment rate remains remarkably low — 3.6% — and the labor market has been a huge talking point for the Biden administration. But economists and policymakers also worry that the labor market is unsustainable. There are far more job openings than job seekers, and the mismatch is causing the Fed to try to reduce the demand for workers without people losing their jobs.

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