Despite US Q1 GDP Contraction, Why Are Economic Fundamentals Considered Strong?

[Image source=AP Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] On the 28th (local time), the U.S. Department of Commerce announced that the Gross Domestic Product (GDP) growth rate for the first quarter of this year was recorded at an annualized -1.4%. This figure significantly missed the market forecast of 1.0% and marked the end of six consecutive quarters of positive growth. It is the first time since the early stages of the COVID-19 outbreak in the first and second quarters of 2020 that a negative growth rate has been recorded. The U.S. economy is assessed to have retreated due to inflation, the Russia-Ukraine conflict, and the aftermath of the COVID-19 pandemic.

Nevertheless, all three major U.S. stock indices closed higher on the day. The Dow Jones Industrial Average rose 1.9%, the Nasdaq increased by 3.1%, and the S&P 500 climbed 2.5%.

Experts interpret the divergence between economic indicators and the stock market as a sign that the fundamentals of the U.S. economy remain solid. The first-quarter GDP contraction is attributed to the trade deficit hitting a record high, which pulled down GDP. U.S. exports in the first quarter decreased by 5.9%, while imports surged by 17.7%, resulting in a trade deficit of -$86.8 billion, the largest ever recorded. Consequently, net exports reduced the GDP growth rate by 3.2 percentage points.

However, this is viewed as a negative factor stemming from external causes, while domestic demand significantly increased due to vigorous consumer activity by Americans. The delayed economic recovery in other countries slowed export growth, so this is not considered a negative factor for the U.S. economy overall.

Furthermore, the -1.4% GDP growth rate in the first quarter is seen as a base effect compared to the previous quarter's 6.9% growth; when compared to the same period last year, the U.S. economy actually grew by 3.6%.

There are also many detailed indicators confirming that the U.S. economy remains robust. Personal consumption expenditures, which account for two-thirds of the real economy, increased by 2.7% (annualized), and business investment rose by 9.2% (annualized). This growth occurred despite the spread of the Omicron variant of COVID-19 earlier this year.

Lee Da-eun, a researcher at Daishin Securities, said, "In conclusion, although the U.S. economy contracted in the first quarter due to external factors, it showed resilience thanks to a strong labor market and investment policies, as noted by the Federal Reserve."

The U.S. economy is expected to continue its solid growth trend in the second quarter as well. Daishin Securities forecasts the U.S. GDP growth rate for the second quarter at 2.8%, expecting a significant rebound supported by increases in consumption, non-residential investment, and base effects. Although the scale of goods consumption is shrinking this year, it remains at a high level compared to the COVID-19 period, and the recovery in service consumption is strengthening. Despite inflationary pressures, rising labor income and accumulated excess savings support household consumption. Considering the U.S. driving season from June to August, the recovery in service consumption is expected to continue at least through the third quarter.

Lee added, "The expansion of non-residential investment in the first quarter is likely to continue steadily despite global economic uncertainties due to structural changes such as reshoring after COVID-19. However, considering downside pressures such as rising energy prices and economic slowdowns in the Eurozone and China, we are revising down the U.S. GDP growth forecast for the second quarter from the previous 3.2% to 2.8%."