GDP Q1 Report: Negative Growth and Stagflation

By at 28 April, 2022, 11:10 am

by Raymond J. Keating –

The first estimate of GDP (i.e., gross domestic product) was released and it was not good.  According to the U.S. Bureau of Economic Analysis, real GDP growth in the first quarter came in at -1.4 percent (seasonally adjusted annual rate). But there were a few bright spots.

The report of negative growth was the first since the pandemic struck in the first and second quarters of 2020. Let’s drill down into the specifics of this GDP report, as the story gets trickier.

Source: Federal Reserve Bank of St. Louis

Some Positives

There are some positives in this report. First, real personal consumption expenditures grew by 2.7 percent in the first quarter.

Second, real fixed investment grew at a healthy clip, that is, by 7.3 percent. That included 9.2 percent real growth in nonresidential, or business, investment. Equipment investment jumped by 15.3 percent and intellectual property investment by 8.1 percent. These are all quite welcome.

Third, residential investment experienced 2.1 percent growth.

The Negatives

So, where are the negatives?

First, real exports declined by 5.9 percent. By the way, in contrast, real imports jumped by a whopping 17.7 percent, following a 17.9 percent gain in the fourth quarter of last year. Some will note these as negatives, since in GDP accounting imports are subtracted. But imports are not economic negatives. This subtraction is done to avoid a kind of double counting, that is, to ensure that only spending on domestic goods is measured in GDP, which measures domestic production of final goods and services.

Second, government consumption expenditures and gross investment declined by 2.7 percent.

Third, the change in private inventories was negative, after big positives in the previous two quarters. While part of private investment, inventory measures are temporary. They don’t reflect long-term investment, but instead, reflect changes in consumer demand, with inventories drawn down and replenished at various times. They are transitory.

If we tally up percentage point contributions to the change in GDP of -1.4 percent, it turns out that exports accounted for -0.68 points, government -0.48 points, and inventory changes -0.84 points. That tallies up to -2.0 percent, exceeding the -1.4 percent change for the first quarter.

A Look at Inventories

By the way, the large gains in inventories in the previous two quarters made large contributions to those GDP gains. That is, inventory changes contributed 5.32 percentage points to the 6.9 percent GDP gain in the fourth quarter of 2021, and 2.2 percentage points to the 2.3 percent increase in real GDP in the third quarter of 2021.

To put this in perspective, in the post-World War II era (since 1950), the average percentage point contribution to the GDP growth rate made by changes in real inventories has been 0.12 percentage points. So, inventories have been fluctuating wildly since early 2020, which is not a surprise given pandemic and supply chain problems.

Raging Inflation

Finally, this GDP report confirms that inflation continues to rage. The GDP price index ranks as a broad measure of prices, and based on this, inflation ran at 8.0 percent in the first quarter, following on 7.1 percent in the fourth quarter of 2021, 6.0 percent in the third quarter, 6.1 percent in second, and 4.3 percent in the first quarter of last year.


Now, after sorting through all of this, are there any clear takeaways? Yes.

First, the fact that private investment grew notably in the first quarter is a positive for growth going forward.

Second, trade – in particular, exports – continues to be a real problem for the U.S. economy.

Third, the U.S. economy shrank in the first quarter of 2022, and real GDP growth in the previous two quarters, considering inventory matters, might not have been as strong as the topline numbers indicated.

And with inflation running hot, all of this points to the U.S. being stuck in a stagflation quagmire. Add another consecutive quarter of negative growth, and that’s basically a recession.

Sound Policy Matters!

Federal elected officials can make a real, positive difference in this mess by turning away from the costly policy direction they’ve been heading in, and instead, implement a policy agenda that will aid in growing the economy and working against inflation, that is, substantive and permanent tax and regulatory relief, advancing free trade, restraining government spending, and a Fed focused on a sound dollar.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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