The US Bureau of Economic Analysis or BEA has reported that the economy contracted 1.4% in the first quarter against growth expectations of around 1%. However, when you analyze the various components of the report and take into account that it is based on a quarter-over-quarter comparison, it shows that there is actually good underlying strength in the report. ‘economy.

First the bad news

The US economy shrank for the first time since plummeting 31.2% in the second quarter of 2020, when Covid-19 shut down much of the economy. With forecasts hovering around 1% growth, it didn’t take much for the calculation to fall into negative territory.

The BEA press release stated: “The decline in real GDP reflects lower private investment in inventory, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased.

He added: “The decline in private investment in inventory was driven by declines in wholesale (mainly motor vehicles) and retail trade (notably ‘other’ motor vehicle retailers and dealers) .” It seems that the chip shortage affecting the auto industry has been a key part of the declining economy.

The press release stated: “Within exports, broad-based declines in non-durable goods were partly offset by an increase in ‘other’ business services (primarily financial services), and lower federal government spending reflects mainly a decrease in defense spending on intermediate goods and services.”

Now for the good news

The imbalance between imports and exports subtracted 3.2% from the GDP growth rate in the first quarter. Had this impact been removed, the reported growth figure would have been 1.8%. While trade has had a negative impact on the reported growth rate over the past eight years and six quarters, in the past 28 quarters there has been only one quarter with a greater impact (3Q 2020 with a negative of 3.25%).

It’s no surprise that with the US economy recovering faster than other major countries, we are buying and importing goods at a faster rate than other countries are buying our exports. Over the past 10 years, the hit to the year-to-year growth rate has been quite small, except for last year.

  • 2012: None
  • 2013: Positive 0.22%
  • 2014: Negative 0.25%
  • 2015: Negative 0.77%
  • 2016: 0.30% negative
  • 2017: Negative 0.28%
  • 2018: 0.29% negative
  • 2019: 0.18% negative
  • 2020: 0.29% negative
  • 2021: Negative 1.40%

In addition, the change in inventories subtracted 0.84% ​​from the growth rate. This can be a volatile number and tends to cancel out on a yearly basis. Over the past eight quarters since the start of the pandemic, these stocks have had an impact on the economy.

  • 1Q 2020: Negative 0.51%
  • 2Q 2020: Negative 4.01%
  • 3Q 2020: positive 6.84%
  • 4Q 2020: positive 1.1%
  • 1Q 2021: Negative 2.62%
  • 2Q 2021: Negative 1.26%
  • 3Q 2021: positive 2.2%
  • 4Q 2021: 5.32% positive

Paul Ashworth, chief economist for North America at Capital Economics, said: “The negative contribution from inventories was inevitable after inventory building added 5.3% points in the fourth quarter, which was the main reason why GDP growth was as strong as 6.9%. Contributions from net trade and inventory will likely continue to swing wildly this year, as retailers desperately try to replenish depleted inventory but are frustrated by periodic disruptions in Chinese production and renewed transportation congestion.

The annual impact of the inventories of the last 10 years is much lower.

  • 2012: Positive 0.17%
  • 2013: Positive 0.23%
  • 2014: Negative 0.12%
  • 2015: Positive 0.28%
  • 2016: Negative 0.55%
  • 2017: Positive 0.04%
  • 2018: Positive 0.09%
  • 2019: Positive 0.05%
  • 2020: Negative 0.52%
  • 2021: Positive 0.35%

Year-to-year variations also had positive signals

The GDP growth rate that the BEA publishes is based on the previous quarter versus the current quarter’s economy. Although this calculation is seasonally adjusted, another way to analyze the numbers is to look at the change from year to year. By digging into these, you find.

  • The economy grew by 3.6%
  • Personal consumption or consumer spending increased by 4.7%
  • Led by services up 6.8%
  • Private domestic investment increased by 10.8%
  • Imports increased by 11.7% while exports only increased by 4.1%

A final analysis

When you also take into account the impact of government spending as well as trade and inventories, it actually shows that the economy grew the fastest in the March quarter compared to the previous two quarters and that it accelerated. Note that going back further than the third quarter of last year, the impact and recovery of the coronavirus distorts the numbers.

  • 2Q 2021: 8.5%
  • 3Q 2021: 1.2%
  • 4th quarter 2021: 2.3%
  • 1Q 2020: 3.1%

This chart from Ashworth helps visualize the past five reported quarters against the underlying growth rate of the economy.