If you grimaced at the most recent US GDP report, you weren’t alone. At first glance, it suggested that the US economy may have entered a recession. nosedived in the first quarter of the year, shrinking by an annualized rate of 1.4%. Bizarrely, though, the details of the report show relatively sound economic fundamentals. In fact, looking ahead, there is reason to be cautiously optimistic about economic growth ove.
Indeed, a closer look at the underlying data suggests that the first quarter figure represents a perfect storm of temporary disruptions that distorted overall GDP growth, rather than signs of a deeper problem.
Gross domestic product is broken up into several pieces — including consumption, investment, government spending and international trade — which measure the overall spending that occurs in an economy. The biggest and most important components are consumption and investment, which measure what US consumers and businesses are doing. While government spending is important, too, it’s a smaller piece, and international trade, which includes exports and imports, can be quite volatile.
Over the first quarter of this year, consumption grew by 2.7%, with spending on services performing especially well. This tells us that Americans are eager to get out of their homes to dine out and go on vacation. Spending on goods was roughly flat for the quarter, which is understandable given how much “stuff” we’ve accumulated over the last two years. This pivot in spending patterns should continue, even as the war in Ukraine drives up prices for things like food and gasoline. Thus, these data show that US consumer spending held up in the first quarter.
Meanwhile, US businesses also continued to spend. Investment in equipment and machinery rose 15% in the first quarter of this year, and investment in intellectual property (like software and research & development) rose 8.1%. This shows that even in the face of rising wages and rising materials costs, US businesses continued to invest in their future.
Inventories are one important caveat to the business spending story. As the pandemic disrupted factories and shipping lanes in 2020 and 2021, warehouse stockpiles got pummeled around the country. US businesses worked to replenish these stockpiles over the last two quarters, and rose by an impressive $193 billion in the fourth quarter of last year and $159 billion in the fris These were big gains, but because the most recent number was smaller than the previous one, the resulting quarter-to-quarter growth rate for inventories declined and hurt overall GDP growth. This drag is therefore a bit misleading.