Real GDP contracted by 1.4% quarter-over-quarter (q/q) in the first quarter of 2022 – a significant slowdown from Q4’s 6.9% (annualized).The reading came in below the consensus forecast, which called for a modest gain to 1.0% q/q.
Consumer spending grew by a healthy 2.7% – up from last quarter’s 2.5%. Spending on services (4.3%) and durables (4.1%) were both higher last quarter, while non-durables (-2.5%) fell. COVID sensitive categories of services spending (i.e., transportation & recreation services, food & accommodation and other services) all continued to recover in the first quarter – contributing about a third of the rise in services spending.
Business investment rose 9.2%, led by a strong gain in equipment (15.3%) spending. Intellectual property products (8.1%) was also up on the quarter. Investment in structures (-0.9%) continued to slide – now recording declines in each of the last four quarters.
Residential investment was also higher by 2.1%, as housing construction continued to surprise to the upside through the first quarter.
Government spending fell for the second consecutive quarter, as spending at both the federal (-5.9%) and state & local (-0.9%) level were lower. In terms of federal spending, both defense and non-defense were down.
Imports surged by 17.7% in the first quarter, which came atop a solid 17.9% gain in Q4. Gains were primarily concentrated in the import of goods (20.5%), though service imports (4.1%) were also higher. Conversely, exports fell by 5.6% – entirely the result of goods exports (-9.6%). This led to a significant widening in the trade deficit, resulting in net trade subtracting a meaningful 3.2 percentage points (pp) from headline growth.
After contributing more the 5pp to Q4 GDP growth, inventory investment was down in the first quarter – subtracting 0.8pp from the headline.
Price pressures continued to accelerate in Q1. The core PCE deflator rose 5.2% on a quarter-over-quarter annualized basis – up from 5.0% in Q4.
Key Implications
The advance estimate of first quarter GDP showed that economic growth was weaker than we had anticipated. However, the details show that demand remained much stronger than the headline suggests. Growth was pulled lower by a sharp widening in the trade deficit and a pullback in inventory investment, shaving a combined 4pp from headline growth. Abstracting from this, domestic demand expanded by a healthy 2.6%, a big improvement from its 1.5% pace in the second half of 2021.
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.
This morning’s number will do nothing to dissuade the FOMC from raising interest rates at next week’s meeting. We expect the Fed to lift the benchmark rate by 50 basis points (bps), and telegraph another 50bps move at its June meeting – consistent with Fed Chair Powell’s recent comments on the importance of “front-end loading” the reduction of monetary stimulus. We also look for the FOMC to give firm guidance with respect to the timing of when they will begin the process of normalizing its balance sheet over the coming months.
