Yesterday first quarter GDP numbers surprised many when they posed a -1.4% mark, indicating that the economy had actually contracted instead of expanding. This was pretty far off from consensus views that the economy would grow by 1.5% that quarter.
Does this mean that we’re going into a recession? Not necessarily.
First, we need to remember that the GDP number from Q4 last year was a huge 6.9% which was driven by exports, personal consumption, and private inventory spending to help combat supply chain issues. So you can see that even the consensus view for this past quarter was significantly lower than the previous.
The largest driver of the GDP this past quarter was a massive trade deficit as well as a significant drop in government spending. The trade deficit alone accounted for -3.2% in GDP points. However, many domestic areas of the economy continue to grow. Consumer and business spending were both strong despite inflation and spending on company intellectual property and residential investment remained strong. †
After looking deeper into the numbers many would say that the American consumer is still on strong footing so there is nothing to fear as of yet. Unfortunately we’re still dealing with residual effects from extenuating circumstances, namely Covid and the Russia-Ukraine war that are causing some large deviations from the norm. After such huge expenditures during the height of covid one would expect government spending to continue to slow from that point, and with ongoing Covid disruptions and international sanctions due to the war, crazy trade numbers aren’t necessarily a surprise, especially when they were flipped the other way last quarter.
Despite the rule of thumb that two negative GDP readings marks a recession, there is more that goes into an actual recession than just this number. Bad recessions have been characterized by the economy shrinking along with rising unemployment and things like high debt default rates. As of right now, unemployment and default rates on corporate debt are still historically low.
I think it’s safe to say that we’re certainly experiencing some economic volatility with these outside forces still dictating much in the labor and trade markets, but there are positives as well with consumer and business spending still going strong.
We’ll see how things shake out this summer and, either way, welcome some sunshine here in PA.