Gross Domestic Product

Gross domestic product contracted last quarter. What went on with the economy is a different story.

The Commerce Department on Thursday reported that GDP fell a seasonally adjusted 1.4% in the first quarter from the final quarter of last year, at an annual rate, marking its first drop since the second quarter of 2020, when the pandemic slammed into the economy.

But the report also showed that private demand actually strengthened, with spending by U.S. consumers, businesses and other private purchasers growing at a 3.7% annual rate in the first quarter versus the fourth quarter’s 2.6%.

So, what gives? For starters, the trade deficit expanded, meaning that some U.S. demand was basically met by other countries’ production. That alone shaved 3.2 percentage points off GDP growth. A growing trade deficit shouldn’t be taken lightly, but in the first quarter it was brought on in part by the roiling effects of the pandemic on international trade: A lot of shipments that would otherwise have landed in the U.S. this fall landed in the winter instead.

In the first quarter, the ports of Los Angeles and Long Beach took in 31% more loaded shipping containers than in the same period of 2019, while in the fourth quarter, they took in 3% fewer than three years earlier.

Another thing that weighed on GDP was that, adjusted for seasonal swings, companies didn’t build inventories at quite as heady a pace as in the fourth quarter. This meant that less production went into filling inventories, shaving an additional 0.8 percentage points off GDP. The fact remains, however, that shortages have left inventories woefully low, and that, given the opportunity, companies will continue to restock their warehouses through the year. That should be a plus for GDP in the quarters to come.

Meanwhile, consumer spending grew at a 2.7% annual rate in the first quarter. This was driven by a 4.3% increase in spending on services—an indication of how Americans are redirecting spending away from goods as pandemic concerns ebb, and also of how inflation, which has been most concentrated in goods, is sapping spending on some categories. (As with the main GDP numbers, the spending figures are adjusted for price changes; unadjusted for inflation, consumer spending rose at a 9.9% annual rate.)

Business spending on capital equipment and the like was particularly strong, with nonresidential investment growing at a 9.2% annual rate.

For now, the stage seems set for robust growth in the quarters ahead. The job market is strong and household balance sheets are in good shape, which should fuel spending beyond inflation. Companies have ample reason to keep investing: Supply chain snarls have highlighted the advantages of bringing some production closer to home, while rising wages make purchases of labor-saving equipment seem more worthwhile.

On the other hand, the economy is bound to slow at some point, if only because the Federal Reserve wants it to. The negative first-quarter GDP print will hardly keep the central bank at bay; rather the firming of demand the details of the report showed might only steel its determination to keep raising rates until both inflation and the job market cool off.

Source: The Wall Street Journal