Why Did US GDP Fall in Q1  2022?

By Shlomo Maital

    Warning!  Boring Economics stuff follows.

    So —  in the first three months of 2022,  ‘experts’ expected the US GDP to grow by 1%.

    Instead it fell!!  By 1.4%.   Yikes. 

    Recession?  Time to worry?

    Not really.  If you can stand 283 words on economics,  here is the explanation. 

    People kept spending money, with consumer spending growing by 2.7%.  That was good.

     But three things dragged the GDP growth figure down.

     One:  the “trade deficit” (that is, the difference between imports and exports).  The US ran a huge import surplus, importing stuff like crazy, catching up on the import slowdown because of clogged ports.  And remember, imports subtract from GDP, because Gross Domestic Product is only stuff made IN THE US!   So, a larger import surplus means slower GDP growth.

    Two:  inventory.  (Bo-o-o-o-oring!).  Inventory is the stock of stuff produced in previous periods.  When inventory falls (as it did),  because businesses are selling stuff they made earlier,  then the component of GDP known as ‘gross capital formation’  falls.  That is – businesses sold stuff they produced in earlier periods, rather than make new stuff.  So this too cuts GDP growth.

    Three:  Defense spending.  US defense spending declined,  temporarily, probably due to COVID and supply chain issues.  This is also temporary.  It will accelerate a lot in the coming quarters, because the US is shipping a major portion of its arsenal to Ukraine (fully a third of US’s Javelin anti-tank missiles were shipped there).  That inventory will be replenished, and GDP will grow as a result. The House of Representative just approved $40 billion in new aid to Ukraine.

    Bottom line:  (if you’ve made it this far):   This is a one-quarter drop in GDP, probably not repeated in Q2.   It is not a signal of recession (which requires two quarters of negative GDP growth).

    However —  a recession could STILL occur.  If the FED tightens credit too rapidly, and this spreads abroad, we will get stagnation plus inflation – the stagflation of the 1970’s. The inflation is supply-side, cost based. Tighter credit cuts demand. A double whammy, both reducing GDP.

    So – Q1 negative growth was noise – but just because people cry ‘wolf!’ doesn’t mean there isn’t a pack of them waiting around the corner.