Why did the US economy shrink in the first quarter of 2022

Five graphs showing why inflation is at a 40-year high

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

What is behind the 1.4% figure?

To summarize, the US economy suddenly contracted at the beginning of the epidemic, and then rebounded in 2021. Last year, the economy by 5.7 percent, Fastest full year clip since 1984.

Economists did not expect the economy to maintain the same momentum this year, as the federal stimulus programs faded and the Federal Reserve moved to raise interest rates to slow growth and deal with higher prices. But the negative GDP data came as a surprise and obscured some signs of strength, such as consumer spending.

Deflation has fueled fears that a recession – defined as two consecutive quarters of negative growth – could loom, as the Federal Reserve rises to as much as Seven price increases this year. But economists do not draw a straight line between this GDP report and the increased risk of a recession. If the economy contracts later this year, it could be for various reasons, such as the Federal Reserve raising interest rates too hard or people backing off spending, economists say.

The White House is trying to adapt to the changing economy

“My big question for the future is, ‘When are they going to start slowing their pocket work? It’s not because of this report, said Beth Ann Bovino, chief US economist at S&P Global Ratings. “From now on, will there be a point when people run out of buffer, start to feel like they’re drowning too much in their savings or that they Tired of paying higher prices?”

Reduction in inventory purchases

One of the main reasons for the economy’s downturn in the first quarter of the year was rooted in so-called retailer purchases, which are commodity companies that commodity companies tend to buy before they need them. Retailers often make purchases early, to get ready for things, like the holiday shopping season. And in some cases, companies stockpile materials if they are concerned about supply chain delays or other problems, such as price hikes. That’s what happened in late 2021. Remember all those supply chain stragglers? Retailers brought in lots of goods early to make sure there were no shortages during the holidays.

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At the beginning of 2022, many of those same companies realized they had a lot of sweaters, toys, or gadgets left and they didn’t need to stock any more. Inventory purchases by themselves account for a large portion of the GDP decline – as much as 0.84 percentage points.

More imports affect GDP

The United States did not export many goods in the first three months of the year. On top of that, the country has imported a lot of stuff, in part due to all the various supply chain problems that have been besieging companies over the past year, even in the face of high consumer demand. This move increased the trade deficit.

The growing trade deficit plays a large role in how GDP is calculated. The GDP report effectively subtracts all things purchased from other countries, which appears as a major drag on GDP. In fact, a decrease in exports and an increase in imports, when taken together, accounted for 3.2 percentage points of the decline.

“Demand for commodities is so strong that Americans are turning to the international economy to satisfy the demand,” said Joe Brusolas, chief economist at RSM. “There has been an increase in demand for goods, and that’s the problem in a nutshell.”

International trade figures also tend to make serious revisions after preliminary GDP estimates. More specific data will be released next week. For now, though, “the local side of the equation has been strong,” Bovino said.

Other major forces in the economy

The GDP report comes as policy makers and economists wrestle with Two main issues In the economy: soaring inflation and a tight labor market.

Inflation rose to highest levels in 40 years, With prices up 8.5 percent in March compared to the previous year. The Federal Reserve is racing to control price hikes before they become an integral part of the economy. Republicans are attacking the Fed for being too slow to respond and blaming Democrats’ sprawling stimulus efforts since last year.

Meanwhile, the job market has shown tremendous strength since 20 million jobs fell from the economy two years ago. Unemployment rate is still Significantly low – 3.6 percent – and the labor market has been a huge talking point for the Biden administration. But economists and policy makers also worry that the labor market is unsustainably hot. There are far more jobs than job seekers, and the mismatch made the Federal Reserve try to curb demand for workers without causing people to lose their jobs.