G.D.P. Report Shows the U.S. Economy Shrank, Masking a Broader Recovery – The New York Times

The economy contracted in the first quarter, but underlying measures were solid.
White House plays down first-quarter growth decline.
A soaring trade deficit detracted from U.S. economic growth figures.
Home building is an economic bright spot, even as the housing market cools.
Record share of Americans say inflation is the top financial problem.
America’s almond farmers are getting squeezed out of the supply chain.
U.S. economic growth is stellar, until inflation is factored in.
The U.S. economy contracted in the first three months of the year, but strong consumer spending and continued business investment suggested that the recovery remained resilient.
Gross domestic product, adjusted for inflation, declined 0.4 percent in the first quarter, or 1.4 percent on an annualized basis, the Commerce Department said Thursday. That was down sharply from the 1.7 percent growth (6.9 percent annualized) in the final three months of 2021, and was the weakest quarter since the early days of the pandemic.
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By The New York Times
The decline was mostly a result of the two most volatile components of the quarterly reports: inventories and international trade. Lower government spending was also a drag on growth. Measures of underlying demand showed solid growth.
Most important, consumer spending, the engine of the U.S. economy, grew 0.7 percent in the first quarter despite the Omicron wave of the coronavirus, which restrained spending on restaurants, travel and similar services in January.
“Consumer spending is the aircraft carrier in the middle of the ocean — it just keeps plowing ahead,” said Jay Bryson, chief economist for Wells Fargo.
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By The New York Times
In the first quarter, slower growth in inventories shaved close to a percentage point off G.D.P. growth. Companies raced to build up inventories in late 2021 to make sure supply-chain disruptions didn’t leave them with bare shelves during the holiday season. That meant they didn’t have to do as much restocking as usual in the new year.
The ballooning trade deficit, meanwhile, took more than three percentage points away from G.D.P. growth in the first quarter. Imports, which are subtracted from gross domestic product because they are produced abroad, have soared in recent months as U.S. consumers have kept spending. But exports, which add to G.D.P., have lagged in part because of weaker economic growth abroad.
A measure of underlying growth, which strips out the effects of inventories and trade, rose 0.6 percent in the first quarter, adjusted for inflation. That represented a modest acceleration from the end of last year.
“The moral of the story is that the Omicron wave, the war in Ukraine and new lockdowns in China were more costly for growth abroad than they were at home,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “Domestic spending was remarkably resilient. It actually accelerated.”

The White House dismissed a slump in first-quarter growth that was driven by a quirk in inventories and a jump in imports, emphasizing that Thursday’s report on gross domestic product also pointed to underlying strength in consumer spending.
G.D.P. declined 0.4 percent in the first quarter after adjusting for inflation, or 1.4 percent on an annualized basis, the Commerce Department said Thursday. Companies had stockpiled inventories in the fourth quarter and built them more slowly at the start of the year, and imports far outstripped exports as Americans bought goods from abroad, driving the decline.
“While last quarter’s growth estimate was affected by technical factors, the United States confronts the challenges of Covid-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength,” President Biden said in a statement following the release, referring to President Vladimir V. Putin of Russia. Mr. Biden also noted that “consumer spending, business investment, and residential investment increased at strong rates.”
Mr. Biden and Democrats are facing a challenging midterm election year as inflation runs at its fastest pace in four decades, chipping away at household budgets and eroding consumer confidence. At the same time, the Federal Reserve is raising interest rates to try to keep rapid price increases from becoming permanent, which could begin to meaningfully cool down the economy just as voters head to the polls.
The administration has tried to pin high inflation on Russia’s invasion of Ukraine. While the war has pushed gas and other commodity prices higher, inflation was high even before Russia’s attack.
Republicans have seized on rising prices to blast Mr. Biden’s economic policies. The decline in growth at the start of the year gave them room to ramp up that criticism.
“Accelerating inflation, a worker crisis, and the growing risk of a significant recession are the signature economic failures of the Biden administration,” Representative Kevin Brady, a Texas Republican, said in a news release on Thursday.
Representative Kevin McCarthy of California, the House Republican leader, also blamed Democrats for the drop in growth and 40-year high inflation levels.
“In 15 months, one-party Democrat rule has squandered America’s recovery and left you paying the price,” Mr. McCarthy wrote on Twitter.
The Biden administration’s 2021 economic stimulus, which sent checks to households and provided other relief at a time when the job market was already recovering, has been criticized by economists for helping to stoke excessively strong consumer demand. That probably ramped up inflationary pressures as the economy reopened, some research has suggested.
Republicans often seize on that to argue that the burst in inflation is the administration’s fault. But administration officials point out that their policies helped to drive a swift recovery, came at an uncertain moment, and built on a pandemic response started under the Trump administration.
In a speech on Thursday, Treasury Secretary Janet L. Yellen defended the scale of the efforts to support the economy. She recalled the dire economic projections in the early days of the pandemic and said that the spending was needed to avert a worst-case scenario, though some economists warned that the final installation in 2021 was too much and too poorly targeted even at the time of its passage.
“Throughout 2020, and into 2021, the path of the pandemic, including its severity and the role of future viral strains could not be predicted,” Ms. Yellen said at an event at the Brookings Institution held by the Hamilton Project and Hutchins Center. “Given this uncertainty, the recovery packages sought to protect against tail risk.”
Jeanna Smialek and
Consumers and businesses in the United States are continuing to buy far more foreign goods than America exports overseas, resulting in an ever-widening trade deficit that weighed on economic growth figures released Thursday.
Demand by American businesses for foreign petroleum and other industrial products surged in March, while households bought more foreign cars and other consumer products, an estimate of trade data released by the Census Bureau on Wednesday showed.
U.S. exports also hit a record in March of $169.3 billion, but they were far outpaced by imports, which reached $294.6 billion. As a result, the trade deficit in goods widened nearly 18 percent to $125.3 billion last month, a record figure.
Those trade flows depressed America’s economic growth figures for the first quarter, since the trade deficit is subtracted from the nation’s gross domestic product. Real gross domestic product, adjusted for inflation, declined 0.4 percent in the first quarter of 2022, following an increase of 1.7 percent in the fourth quarter of last year. But the data reflect a mix of economic factors, not all of them negative.
U.S. demand for imports has been buoyed by the strength of the American economy, which remains more robust than that of most foreign nations, and consumer spending and business investment were solid in the first quarter.
But slower growth in inventories shaved close to a percentage point off G.D.P. growth, while the ballooning trade deficit subtracted more than three percentage points from the figure.
Importers and exporters have faced a litany of challenges over the past two years, with companies trying to cram record volumes of consumer goods through ports, warehouses and trucking lanes as the pandemic sapped their work forces.
Congestion in some parts of the supply chain, like the U.S. trucking industry, appears to have eased in recent months, but new complications have arisen in other areas, stemming from the war in Ukraine and the continued global toll of coronavirus.
A report from analysts at Bank of America this month said the trucking capacity available to shippers had reached its highest level since June 2020, while rates for truckload shipments have fallen in the last month.
Russia’s invasion of Ukraine has also disrupted flows of energy, food and other commodities, rupturing supply chains and sending prices of some goods soaring. And China, home to much of the world’s manufacturing, is imposing sweeping lockdowns to keep the coronavirus from spreading.
Tracking by Flexport, a freight forwarder, shows it took an average of 112 days to ship a container from China to the United States as of April 23, compared with fewer than 50 days before the pandemic. The measure fell slightly earlier this year, but has crept back up in recent months.
Shipping rates have also eased slightly, but remain far higher than they were two years ago.

The red-hot housing market is showing signs of cooling down. But there wasn’t much evidence of that in the G.D.P. report on Thursday.
Mortgage rates have jumped this year in response to the Federal Reserve’s efforts to rein in inflation. That has led to a steep drop in mortgage applications, and sales of new and existing homes have also fallen in recent months. Anecdotal evidence from across the country suggests that the madcap bidding wars that have characterized the residential real estate market for much of the past two years may be starting to fade.
Nonetheless, data from the Commerce Department on Thursday showed that residential construction grew by about 0.5 percent in the first quarter of the year, adjusted for inflation. That was down only slightly from the end of 2021.
The expected strength of housing in the G.D.P. report is partly about timing: Mortgage rates didn’t top 4 percent until the first quarter was almost over. But economists also said it would take time for any slowdown in home sales to filter through to construction. Large housing developments are planned months or years in advance, and years of underbuilding after the last recession means there is still plenty of demand for new housing. Applications for new building permits rose in March, Commerce Department data shows.
“The shortage doesn’t go away right away,” said Ethan S. Harris, head of global economics for Bank of America. Still, he said, by next year construction, too, will probably be slowing down.
That would be welcome news for policymakers at the Federal Reserve, who are trying to cool the economy without causing a recession. The housing market, because it is so responsive to interest rates, is a primary channel by which the Fed’s policies affect the real-world economy. When people buy houses, they also tend to buy furniture and appliances, so a drop in home sales tends to bring less demand for goods.
But many economists also say the only way for the United States to address its housing-affordability crisis is to build more homes, particularly in and around the cities where jobs are most plentiful. A slowdown in home construction, they warn, could be good for the country’s short-term inflation picture, but bad for its longer-run affordability crisis.

The share of Americans listing inflation as the most significant household financial problem reached a record high in a Gallup survey released Thursday.
People in all income groups were more negative about their personal finances compared with last year. With inflation hitting 8.5 percent in March, the fastest pace in 40 years, more people said their financial situation was worsening than said it was improving.
A total of 46 percent rated their personal finances positively, down from 57 percent last year, when a majority of households were freshly benefiting from rounds of direct federal aid.
Gasoline prices — which have been elevated this year, spiking sharply after Russia’s invasion of Ukraine in late February — loomed large in the poll, which was conducted among 1,018 adults from April 1 to April 19.
Fifty-two percent of those surveyed said that the jump in gasoline prices has caused hardship for their family — a figure that, while sobering, was much lower than the polling organization measured during other times of rising fuel prices. Jeffrey M. Jones, a senior editor at Gallup, said that may be because “people expect the increases to be temporary.”
Besides dampening the national mood, inflation has been a palpable force of financial precariousness among lower-income families. Many have been relying on declining cash reserves built up during the pandemic to cushion them against price increases.
Consumer spending accounts for roughly 70 percent of the $23 trillion U.S. economy, so escalating food and energy costs have led economists to worry that a drawback in less essential spending among lower-income families could contribute to a harsher-than-expected slowdown in the coming year.
Anonymized credit card spending data collected by Bank of America researchers indicates a drop in discretionary spending among households with less earnings as oil prices soared in March. Spending on a broad batch of goods and services, however, has recovered among this group. That is potentially because households with an annual income of less than $50,000 still have about twice the savings they did before the pandemic, according to the bank, even as their purchasing power has declined.

During a normal spring, the sight of orchards bursting with clusters of almonds is a boon throughout California’s Central Valley. Here is money growing on trees.
Not this year, Peter S. Goodman reports for The New York Times.
Shipping companies — which last year collectively secured profits reaching $190 billion — harvested especially enormous returns on their routes from Chinese ports to the West Coast of the United States.
Traditionally, he writes, carriers unload containers arriving from China at the twin ports of Los Angeles and Long Beach and then ship empties up to Oakland, where they are reloaded with almonds and other agricultural crops.
But in recent months, the carriers have put growing numbers of empty containers back on ships immediately. The companies can make more money sending the valuable containers directly back to Asia, where they are refilled with goods destined for American consumers.
Almond growers, like Scott Phippen, have been left with sharply limited options to deliver their wares to customers abroad. His warehouse, in Manteca, Calif., is stuffed with the leftovers of last year’s harvest — 30 million pounds of almonds stored in wooden and plastic bins stacked to the rafters and overflowing into his yard.
The exasperation of agricultural exporters, Mr. Goodman writes, amounts to the latest chapter of the Great Supply Chain Disruption, the tumultuous reordering of international trade and transportation amid the worst pandemic in a century.
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U.S. gross domestic product fell 0.4 percent in the first quarter. But that number is adjusted for inflation, and inflation is running at its fastest pace in four decades. In actual dollar terms, not adjusted for inflation, G.D.P. grew by 1.6 percent — down from 3.5 percent in the final quarter of 2021, but strong growth by almost any standard.
Put differently, the United States as a whole — consumers, businesses, nonprofit organizations, the government — spent more in the first quarter, but got less in return in goods and services.
The growing gap between what economists call “real” (inflation-adjusted) and “nominal” (unadjusted) growth reveals a lot about the complicated state of the U.S. economy. Demand for just about everything is exceptionally strong: Consumers want cars and houses and meals at restaurants; companies want workers and materials so they can sell them those things.
Supplies, however, haven’t been able to keep up with demand, in part because of the ways the pandemic upended supply chains, spending patterns and the labor market. And Economics 101 teaches that when demand outstrips supply, prices rise, resulting in inflation.
“It’s like a wedge being shoved between real and nominal, and it just keeps getting wider and wider,” said Beth Ann Bovino, chief U.S. economist for S&P Global. “That’s where the pain is.”
In nominal terms, economic output has surpassed its prepandemic trend. But adjusted for inflation, it still hasn’t caught up.
Notes: Data is seasonally adjusted. Trends are based on the Congressional Budget Office’s forecasts from January 2020.
Sources: Commerce Department, C.B.O.
By The New York Times
The Federal Reserve is trying to cool off demand by raising interest rates. But there isn’t much it can do about supply. Economists at the Fed and elsewhere hope that as the pandemic recedes, supply chains will normalize and that sidelined workers will return to the job market. In theory, that would allow supply to pick up and inflation to cool. But no one is sure when that will happen, if it does at all.

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