U.S GDP Drops -1.4% | Are we Headed Towards a Recession?

May 4, 2022

On Thursday April 29th, the Commerce Department reported that America’s first quarter GDP growth came in at -1.4%, below economists’ expectations of a positive +1.0%. This is the first negative print quarter since the Covid induced flash recession in the 2nd quarter of 2020. Is it time to panic, sell your equities and sit it out because a recession is forthcoming?

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?” This week’s topic is last week headline news story of a weak economy and negative GDP growth in the first quarter.

First off, I will continue to remind investors that government data is reported late, it is often revised multiple times, and it is almost never predictive to the economy or stocks.

Yes the -1.4% decline is a sharp slowdown from the +6.9% gain in the fourth quarter of last year. The hurdle for ‘real’ growth was almost impossible. The GDP price index rose by +8.0%. This means that a real GDP contraction of -1.4% was still a nominal GDP EXPANSION of over 6.5% which is insanely strong for a developed economy like the US.

While we were one of the early firms calling for a first half slowdown in USA growth, there is almost no chance that the economy shrunk last quarter and this report does not change our expectations that the Federal Reserve will likely hike 50 basis points in May and another 50 in June which should keep volatility elevated. Investors who care about these government statistics should look behind the headline number to see what is really going on in the economy.

The drop off in the first quarter GDP was led by a surge in imports, mostly delayed goods for Christmas hitting our ports and shores. Strangely, imports count as a subtraction, or negative component to the calculation for GDP. Imports jumped to a record high in March as the huge backlog of ships containing goods at the port of Los Angeles and other ports that were waiting at the end of 2021 were finally unloaded.

The second area of “weakness” in the report was in federal government spending, specifically defense spending, which was a carry-over from President Bidens 2021 budget. Clearly the recent Russian invasion of Ukraine will reverse that line item in the coming quarters.

While we continue to expect a normal summer slowdown ahead due to higher mortgage rates and fewer government handouts to consumers, personal consumption rose over 2.5% in the first quarter of 2022 due to our economy running at full employment levels. Moreover, fixed capital investment rose over 7% on top of 4th quarter 2.7%, as companies have begun investing domestically in capability, “reshoring” some of the capacity that had been outsourced to foreign countries over the last 30 years.

Is this story of a negative GDP quarter news? Yes. Enough people follow and report on this data that we feel compelled to discuss it. Is it something our investment team worries about? No. We have been clear for the last 4 years. There is nothing predictive about government economic data. Is it a signal of an impending recession? Not in our view. It’s noise for your investment accounts.

As we have tried to stress since last November, this should be a sloppy, choppy mess of a first 3 quarters in 2022, however there should be some good short-term news ahead. Tune in to our Friday podcast, keeping you connected to your money, to see what our team is thinking.

Give us a call to speak to an advisor and let us help you craft a financial plan that meets your retirement goals. Call us at (877) 896-0040, we are here to help you on your financial journey into and through your retirement years.

I’m Chris Perras and from Everyone here at Oak Harvest Financial Group, have a great week!