The U.S. economy shrunk at a 1.4% annualized pace in the first quarter of 2022, its first contraction since the early months of the Covid-19 pandemic in 2020. Yet the stock market largely shrugged off the news. There are good reasons not to panic yet, if history offers any guidance.
The U.S. Bureau of Economic Analysis has been tracking the gross domestic product numbers since 1947. Over the past 75 years or 300 quarters, the annualized rate of quarterly real GDP growth has turned negative 44 times. Not all resulted in recession, which typically requires two negative quarters back to back.
In the first quarter of 2011 and 2014, for example, the real GDP contracted 1% and 1.4%, respectively, but later jumped back to grow 2.7% and 5.2% in the respective second quarters. Those one-time blips didn't lead to recession.
Another example was during the 1950s. The real GDP contracted 1.5% and 0.4%, respectively, in the first and third quarter of 1956; bounced back strongly in between; and then again fell by 0.9% in the second quarter of 1957. But the economy didn't officially step into a recession until the economy shrank dramatically in the fourth quarter of 1957 and first quarter of 1958, falling 4.1% and 10%, respectively.
The upshot is that even if the second quarter of 2022 turns positive, investors shouldn't let down their guard. Historically, it's quite common after a quarter of contraction to see a "rebound" -- often stemming from falling interest rates and other stimulus policies -- only to be followed by bigger falls ahead. That's what happened in the 1974 and 1982 recessions, as well as the ones in 2000 and 2008.
Further complicating things, when U.S. recessions begin and end are based on the subjective judgment of a committee of the National Bureau of Economic Research. The NBER looks at a series of economic indicators----besides just the quarterly GDP data----before making a determination.
There have been recessions that didn't include two consecutive negative quarters. The NBER identified March to October 2001 as a recession, even though the GDP contraction -- in the first and third quarters of 2001 -- didn't happen consecutively. The second quarter of that year actually saw a 2.5% growth in real GDP.
Besides the top line numbers, investors need to examine why an economy is contracting in a particular quarter. The biggest factor behind the GDP drop in the first quarter of 2022 was a surge in imports and trade deficit, as Americans began buying more goods from overseas. That could be a sign that the U.S. economy has recovered more rapidly than others around the world, not necessarily a harbinger of future economic distress.
Government spending fell in the first quarter of 2022. And businesses slowed down their rapid inventory rebuild -- a major contributor to strong growth in the fourth quarter of 2021 -- which also put a dent into the first-quarter's economic growth. "This is noise, not signal," said Ian Shepherdson, chief economist at Pantheon Macroeconomics, "The economy is not falling into recession."
By contrast, consumer spending and private-sector investment -- most reflective of the economy's momentum -- remained strong in the first quarter. That likely will keep the Federal Reserve on track to raise interest rates at its policy meeting next week, likely by half a percentage point, economists say.
"With strong growth of consumer spending, business investment, and employment in the first quarter, the U.S. economy was not in a recession at the beginning of the year," Bill Adams, chief economist for Comerica Bank, wrote Thursday, "Growth should resume in the second quarter as the trade deficit and inventories become smaller headwinds.
Still, a second-quarter GDP rebound, even if it happens, won't be enough to assuage fears of a recession later this year or next year. If inflation continues to soar and the Russia-Ukraine war leads to a global commodity crunch, it's unclear how long consumer demand will remain strong as Americans spend down excess savings accumulated during the pandemic.