EDITOR'S NOTE: So, how do we interpret the 1.4% drop in overall U.S. GDP? If you can recall the day the figure was released, the markets more or less shrugged it off. Yet, it’s a confusing and, if we may say so, slightly deceptive figure. Consumer spending was pretty strong. In fact, if you strip the entire GDP report of everything but that, we would have seen a 2.6% uptick. Yes, positive growth. That’s because spending shifted from goods to services. Some analysts don’t think the drop signals anything alarming for the near term. Recession? Not anytime soon, some experts say. But remember that GDP is a lagging indicator. What it says about the near term may not match the picture when looking further down the horizon. So, what was behind the drop? And even if consumer spending looks as if it’s still going strong, how long can this trend last amid rising inflation, geopolitical uncertainty, and fears of a global growth slowdown? It’s all mixed up, and the conflicting opinions are presented in the article you’re about to read.
Consumer demand continues to defy pressures on the economy, Hope writes.
Catch up quick: Overall U.S. GDP shrank at a 1.4% annual rate in the first quarter, the Commerce Department reported today.
- But within that figure, consumer spending remained strong, growing at a 2.7% rate.
Why it matters: The contraction — the first since the start of the pandemic — “shouldn’t be taken as a signal of heightened near-term recession risks,” JPMorgan chief U.S. economist Michael Feroli wrote in a note today.
- It should instead “reinforce concerns about the economy's longer-run growth potential.”
State of play: The factors that dragged down the economy were not directly related to consumer activity — suggesting that underlying growth remains strong for now, Axios’ Neil Irwin notes.
- Trade continued to drag on growth for the seventh straight quarter as exports fell unexpectedly.
- In response to last year’s overcorrection of inventory buildup to avoid 2020’s supply chain snafus, businesses continued to slow down their inventory stockpiles — and GDP counts that as a negative.
- When stripped of those two factors, the U.S. economy grew at a 2.6% rate last quarter, a slight uptick from the end of last year.
The big picture: Consumer spending continues to grow in part because demand has continued to move from goods to services.
- “The overall U.S. consumer from our vantage point is in good shape,” McDonald's CEO Chris Kempczinski said on this morning’s earnings call.
What to watch: JPMorgan doesn’t expect the Federal Reserve will “read much into today’s report” and cause it to come off its path of tightening.
- The negative headline number may, however, become a political liability for President Biden and the Democrats, Neil notes.
- Also, revisions. The advanced GDP report generally gets revised substantially.
Originally published by Axios.