The second edition of 1Q22 GDP growth for the US economy includes details such as both continuing the first contraction since the pandemic intensified in the first half of 2020, and a more negative revision. Accordingly, GDP contraction was revised from 1.4% to 1.5% in 1Q22.
If we look at the sub-items; The decline in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports subtracted from the GDP calculation increased. Personal consumption expenditures (PCE), non-residential fixed investment and residential fixed investment increased. The negative import impact from net trade and the larger negative contribution from slower inventory accumulation seem to have driven the decline. Consumption was revised upwards from 2.7% to 3.1%, a more robust trend than headline data, revealing a solid consumer demand is still supportive of economic growth. Final sales to domestic buyers (GDP excluding inventories and trade) were revised slightly higher following upward revisions to retail sales.
The housing sector was revised down from 2.1% to 0.4%, revealing the negative effects of both increasing mortgage rates and rising prices. The Fed's continued rate hike could further aggravate the slowdown in demand in some of the economy's most interest-rate-sensitive sectors, such as housing and construction. Profits from current production (company profits with adjustments for inventory valuation and capital consumption) declined by $66.4 billion in the first quarter, as opposed to a $20.4 billion increase in the fourth quarter. Businesses are reevaluating market conditions, inflationary risks and capital expenditures. On the other hand, the increase in the salary market is a development that may cause an asymmetrical effect for the same employment market, because as the salary scale increases, the budgets of some companies will be affected and it will reflect on the profits. This period is more advantageous in terms of large-scale companies, but the coefficient felt in medium and small-scale enterprises is greater, and the separation asymmetry developed over this metric during the pandemic.
Is the decline in demand so severe that it plunges the US economy into recession? Consumption data is not in a region that indicates recession, although 1Q22 no longer indicates the current situation. Spending on services remains strong, roughly twice the weight of goods in the consumer basket. Looking forward, consumer demand could continue to drive growth even as spending moderates towards the end of the year. But higher gasoline and food prices are already having a significant impact on consumer sentiment.
If we look at other data; In the week ending May 21, 210K first jobless claims were filed in the US. This was slightly below the expected drop to 215K from 218K a week ago. Continuing filings rose to 1.346 million in the week ended May 14, beating expectations for a decline from 1.315 million in the previous week to 1.31 million. The insured unemployment rate rose from 0.9% to 1%. The 4-week average increased from 199,500 to 206,750.
The level of unemployment claims remains low, which is of course indicative of the tight conditions in the labor market. Applications had bottomed out with 166K in the week ending March 19. A significant increase in unemployment claims is not expected in this environment of rising wages and labor demand. Government subsidies had increased demand for work when it was deactivated when the pandemic was over, and now companies' demand for staff has increased. A tight labor market, rising wages and consequent solid consumer demand will of course also feed into inflation driven by wages and operating costs.
If we look at it from the Fed's point of view; Wage-inflation spiral and ongoing consumer expenditures are important criteria for the source of inflation. Therefore, there will be a period when more reference will be made to demand-driven inflation.
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