Economic Commentary

Economic Commentary

April 28, 2022

The “I’s” have it – Inflation, imports, and inventories punched down first quarter growth 

Executive summary

The U.S. economy unexpectedly fell 1.4% on an annualized basis in the first quarter, missing the consensus expectations for an increase of 1.0%, and was well below the fourth quarter pace of 6.9%. On a nominal basis, first quarter growth was 6.5%.

Additionally, net exports carved off 3.2 percentage points from real, or inflation-adjusted, gross domestic product (GDP) as imported goods surged (think backordered goods). Excluding net exports, real GDP rose a respectable 1.8%. Also, business inventories shrank, slicing off another 0.8 percentage points, since those backordered goods were simply delivered rather than accumulated for future sales.

More importantly, overall demand remained strong. Consumer and business spending reaccelerated, which are among the reasons we believe that the U.S. economy will avoid a recession. Unfortunately, we expect hotter inflation will persist, which means it will continue gouging real GDP for the next few quarters, though not as badly as the first quarter. 

Inflation gouged real GDP

We typically only discuss inflation-adjusted or real GDP, which fell 1.4% on an annualized basis during the first quarter. Yet, with significantly higher inflation, it is fitting to also show the nominal figures, which grew 6.5% during the first quarter. As this chart shows, higher inflation readings dramatically dented real first quarter GDP.

bar graph   Bar graph comparing nominal GDP and Real GDP from December 2020 to March 2022 showing that higher inflation readings toward the end of that period dramatically dented real first quarter GDP in 2022.

The U.S. economy slipped to $19.7 trillion in real GDP terms in the first quarter. Still, that’s 2.8% higher than the pre-pandemic level. On a nominal basis, the economy expanded to $24.4 trillion.

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