Apr 27, 2022 - Economy

Get ready for a soft GDP report

Data: Bureau of Economic Analysis; Chart: Axios Visuals
Data: Bureau of Economic Analysis; Chart: Axios Visuals

When the government releases new GDP data Thursday morning, it is likely to show weak economic growth — but for quirky reasons that don't matter much in terms of the outlook for the months ahead.

Why it matters: Economic growth is slowing as the initial post-pandemic bounceback fades. But the underlying growth trend in the first three months of the year is likely to be stronger than the headlines suggest.

What we're watching: The Bureau of Economic Analysis will publish its preliminary estimate of first quarter GDP at 8:30 a.m. The official consensus forecast of analysts surveyed by FactSet is that it will show 1.6% annualized growth, but that number is outdated — new trade data Wednesday point to even lower GDP growth.

  • For example, JPMorgan Chase economists downgraded their first quarter GDP growth projection to 0.7%, from 1.1% before the trade data.

A negative number — that is, contraction in GDP — is a possibility, and would be a particular headache for the Biden administration as it emphasizes the strong track record of economic growth over the last year.

  • Any number lower than 2.3% would be the softest growth since mid-2020, when the pandemic recovery began.

Yes, but: A major factor driving the softness is inventory adjustments. While companies were building their depleted inventories in the first quarter, early data suggests they did so less rapidly than in the fourth quarter, which in the arithmetic of GDP subtract from growth.

  • But inventory adjustments tend not to presage future economic activity. Consumer spending and business investment tend to be more self-sustaining and thus tell a more accurate story about the economy's underlying strength or weakness. Forecasters expect those to be strong.

Another factor set to drag down the overall growth numbers is a widening trade deficit. That reflects a combination of import growth, reflecting strong domestic demand, and flatlining exports due to softness in the rest of the world.

Be smart: This will be a preliminary estimate of first quarter GDP, and it may be revised substantially over the next two months as more complete data becomes available. Revisions have been particularly large through the volatile pandemic period.

The bottom line: When the GDP numbers come out, pay less attention to the headline number and more to the details, namely whether consumer and business spending remained robust.

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