The week in review
- 1Q22 GDP: -1.4% q/q SAAR, 3.6% y/y
- Case-Shiller Home Price Index: +2.4% m/m, +20.2% y/y
- Consumer Confidence: 107.3 (vs. 107.6 prior)
- PCE Deflator: +0.9% m/m, +6.6% y/y
The week ahead
- April Jobs Report
- JOLTS Job Openings
- Trade Deficit
Thought of the week
The U.S. economy contracted by an annualized 1.4% in 1Q, well short of consensus expectations for a 1.0% expansion. This follows a positive surprise in the fourth quarter, which showed a boomy 6.9% annualized growth rate. The first quarter’s dismal headline rate masks some positive underlying dynamics in the economy. The average growth rate between 4Q21 and 1Q22 was 2.7%, which is likely a better measure of the true momentum in the U.S. economy.
In the first quarter report, weakness was primarily due to the notoriously volatile inventory and trade sectors, as the chart highlights. Trade subtracted 3.2% from overall GDP growth, as exports fell sharply and imports soared. While the trade deficit detracted from real GDP in the first quarter, it does reflect a U.S. economy with significantly stronger domestic demand than the rest of the world, a testament to the strength of the U.S. consumer. This was apparent in real consumer spending, which grew by 2.5% ann. in the fourth quarter and 2.7% ann. in the first quarter, and was the largest positive contributor to 1Q GDP. Real private inventories grew by a solid $158.7Bn annual pace; however, this came below the record high in 4Q21, thus detracting slightly from GDP.
Overall, while we believe economic fundamentals are healthier than the GDP print suggests, it’s clear the economy is running out of room to grow. This may signal increased economic fragility and raises the risk that the Fed’s expected rate hiking cycle could tip the economy into a recession.