United States: GDP records sharpest contraction since Q2 2020 in Q1, but underlying conditions are solid
April 28, 2022
GDP contracted 1.4% in seasonally-adjusted annualized rate terms (SAAR) in the first quarter, below the 6.9% expansion recorded in the fourth quarter of last year. Q1's reading marked the worst result since Q2 2020. That said, the reading was mainly due to booming imports and lower private inventory investment, and underlying conditions were still healthy.
Private consumption growth accelerated to 2.7% SAAR in the first quarter, which marked the best reading since Q2 2021 (Q4 2021: +2.5% SAAR). The strong labor market and households running down savings kept consumption buoyant in Q1, despite higher inflation and the Omicron Covid-19 wave early in the period. In contrast, government consumption dropped 2.7% (Q4 2021: -2.6% SAAR) amid lower defense spending and the roll-back of federal support programs. Meanwhile, fixed investment growth sped up to 7.3% in Q1, from the 2.7% expansion recorded in the prior quarter, amid stronger investment in equipment.
Exports of goods and services fell 5.9% on a SAAR basis in the first quarter, which was below the fourth quarter's 22.4% expansion. In contrast, imports of goods and services growth remained rapid at 17.7% in Q1 (Q4 2021: +17.9% SAAR).
On an annual basis, economic growth moderated to 3.6% in Q1, compared to the previous period's 5.5% growth. Q1's reading marked the worst reading since Q1 2021.
Commenting on the outlook, Thomas Feltmate, senior economist at TD Economics, noted:
“Chatter about recession has been building, and the negative print on this morning's GDP is likely to further fan those fears. While the possibility of a 2023 recession can't be ruled out, current momentum in the economy remains too strong for things to suddenly sputter out. The labor market remains as tight as ever, which is manifesting in healthy wage gains helping to partially insulate households from higher food and energy costs. Moreover, recent data points on housing construction, industrial production and durable goods orders all point to continued momentum on the domestic demand front as we move into the second quarter. We look for GDP to rebound to over 2% (annualized) in Q2.”