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Some Perspective on Q1 Negative US GDP

US Q1 2022 GDP released Thursday morning by the US Bureau of Economic Analysis (BEA) showed real headline GDP shrank by -1.4%, widely missing the consensus expected growth rate of +1.0%—please note, the report is preliminary and subject to revision, as the data set used is unfinished.

To decipher this report for what it truly is, we must look beyond the negative headline and review the components. There is good and bad news: government retrenchment and seemingly temporary adverse effects masked robust and continued private sector growth. The most significant negative detractor was net exports, but this negative number should not surprise anyone, given the current lockdowns in China and the continued Ukraine conflict. Additionally, inventories and government purchases also held real GDP down.

On the brighter side, consumer spending (the largest component of our economy), business investment in equipment and intellectual property, and home building all increased in Q1. Combined, personal consumption, business fixed investment, and home building grew at a 3.7% annual rate in Q1.

Private-sector wages and salaries led to the growth in income, up 0.6% in March, but you might have noticed personal income is down 11.6% compared to a year ago. This decline is from a one-time detraction due to stimulus checks distributed as one-time payments in March 2021. So, after we do a little math and strip out government transfer payments, personal income is up 8.6% in the past year, with private-sector wages and salaries up a vigorous 12.8%. Consumption, meanwhile, rose 1.1% in March and is up 9.1% from a year ago. Since bottoming in April 2020, consumption has grown at a massive 19.3% annualized rate, and spending today stands 14.1% above February 2020 levels.

Said differently, pure private-sector GDP components (consumer spending and investment in non-residential structures, equipment, intellectual property, and housing—almost 87% of US GDP) increased and accelerated from Q4 2021, which had a neck-breaking headline GDP rate of 6.9% annualized. Did you catch that? The main engine of our economy is doing better than it was in Q4 2021, which is a widely missed positive.

Yes, inventory changes also detracted from Q1 GDP (-0.84%), but try to look at it through a different lens. A decline in inventory can show firms are making sure they do not over-invest in the current robust demand environment. This decision might help telegraph that corporations are looking at future demand slowing and actively planning, so they do not have too much future inventory. Thus, eliminating future negative price pressure.

More positives, government spending, fell by -2.7% annualized, detracting -0.48 points from headline growth. That hurts in the short term but is better for the economy in the long term, because government spending has never proved to be as efficient as private sector spending. Additionally, consumer spending grew by 2.7% annualized, buoyed by services up 4.1% inflation-adjusted—not enhanced artificially by high prices.

Furthermore, a tremendous non-GDP reason to be optimistic about US growth in 2022 is the high and rising Leading Economic Index (LEI). In March, the Conference Board’s US LEI rose 0.3% m/m, its 11th rise in 12 months. Of the 10 underlying components, 7 contributed positively. One of the most significant contributors, the yield spread, continued to widen—the difference between the 10-year Treasury yield and federal funds rate gives a sense of banks’ net interest margins—ability to make profits. The wider the spread, the more incentive banks have to lend. The spread continued to widen over the past three months, which is a positive few are talking about in the news.

Moreover, no recession has ever begun in modern times while the LEI was high and rising. With many predicting a US recession around the corner now more than ever, LEI’s current positive growth signals should help you see through the fog to what still looks like a good year ahead.

In closing, sometimes market volatility can seem almost unendurable, but if investing in the market was easy, everyone would do it and be a billionaire. So, keep your wits about you because this isn’t the first negative Q1 we have witnessed while still capturing positive yearly growth.

YEAR     Q1 GDP               Full Year GDP

1956     -1.5%                   +2.1%

2001     -1.3%                   +1.0%

2011     -1.0%                   +1.5%

2014     -1.4%                   +2.3%

2022     -1.4%                     ???

Source: US Bureau of Economic Analysis

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