Despite being buffeted by soaring prices, the economic effects of the war in Ukraine, and persisting supply-chain troubles, America’s economy seems to be weathering these pressures on growth better than other developed countries.
The US economy continues to be resilient in the face of weakening external demand, inflation at multi-decade highs, tightening financial conditions, and challenges to the global supply chain. While growth unexpectedly contracted in the first three months of the year, the underlying picture of the world’s largest economy still looks assured, as household consumption remains robust and labour markets improve.
At first glance, the advanced estimate of first-quarter (Q1) US gross domestic product (GDP) was much weaker than expected. In fact, activity declined by 1.4% on an annualised rate. This was significantly lower than the 6.9% growth recorded in the fourth quarter of 2021, and was the first drop in output seen since mid-2020, when COVID-19 restrictions decimated activity.
Nevertheless, many economists dismissed the report as an indicator of an imminent recession, given the contraction was primarily driven by weaker trade and a slower inventory build. Reduced external demand, due to moderating growth elsewhere, led to a 5.9% decline in exports from the US.
Concerns over supply shortages, due to disruption in China and the war in Ukraine, encouraged companies to front-load imports, resulting in a widening of the trade deficit. Inventory data tend to be volatile. After a strong build in the fourth quarter, companies appeared cautious to increase their stock further in Q1.