The ‘R’ Word: Resilience, Not Recession

GDP slips into negative territory, but economic indicators remain strong

By Joe Higgins, Quest 4 Quality

  • GDP ends first quarter down 1.4 percent, vs. expectations of 1 percent growth
  • Trade imbalances had an outsized impact
  • Supply chains take another hit with the war in Ukraine
  • Economy still shows underlying strength, with robust consumer spending and job creation

In a surprise to most economists, first quarter gross domestic product contracted at an annualized rate of 1.4 percent, coming in well below expectations for 1 percent growth.

The results were disappointing but not a disaster. The economy’s last negative GDP was in the second quarter of 2020, which was the precursor to that year’s U.S. recession. Negative GDP numbers are never good, but Q1 was stung by worsening supply chain issues, a near-total shutdown in Shanghai, Russia’s incursion into Ukraine, and the latest COVID-19 variant, which impacted spending.

These issues offer no historical basis that economists can use to predict financial outcomes. As everyone from Yogi Berra to nuclear physicist Niels Bohr reportedly said, “It is difficult to make predictions, especially about the future.”

What caused GDP to tank in the first quarter? The number one issue was our trade imbalance. Imports were up over 20 percent in Q1, while exports fell more than 6.1 percent. Imports are a net drain on GDP, and this gap resulted in a net loss of 3.3 percent from the first quarter’s overall growth.

Second, we were expecting an improvement in the movement of goods globally, which did not happen. The war in Ukraine, which experts thought would be over in a few days, has continued now for more than two months. This has impacted oil and food prices and disrupted shipping.

The third issue was our old nemesis, COVID-19. When China shut down Shanghai, a manufacturing and financial epicenter, it caused a backlog in production — which was another hit to supply chains — and raised inflationary pressures, sending ripples throughout the global marketplace.

 While it is rare for the U.S. to experience negative growth, the good news for BrandSource dealers was that personal consumption expenditures were up 2.7 percent following the fourth quarter’s healthy 2.5 percent increase, and business spending rose 9.2 percent. Consumer spending comprises 73 percent of GDP, and companies’ response to consumer demand represents another 8 percent. The other important indicator for the home goods industry was that durable goods orders also rose last quarter. If Americans continue to travel, dine out, refurbish their homes, and shop at malls, GDP growth will be positive for the balance of this year.

Americans have also been impacted by inflation in 2022, and prices have reached a 40-year high of 8.5 percent. On March 16, Jerome Powell announced a 0.25 percentage point hike in interest rates, the first increase since November 2018. Consumers can also expect the Federal Reserve to raise interest rates again in May, with the possibility of a 50-basis point hike. These increases have already spiked the mortgage rate on a 30-year loan to 5.11 percent, and as a result we are seeing a slowdown in housing and a 70 percent drop in loan applications.

Powell’s conundrum is this: Job openings now exceed 11 million, unemployment is at an extremely low 3.6 percent, and consumer spending is heading to a robust 3 percent. At what level will higher interest rates slow economic growth enough to pull back the reigns on inflation without bringing on the next recession? This is a complicated dance the Federal Reserve is attempting right now, and its track record is not good: in 1981 and 1982, Paul Volker tried reigning in inflation with rate increases and triggered a rare double-dip recession.

Another economic shock came from the International Monetary Fund (IMF), the world’s leading lending organization, which downgraded its global growth expectations from 6 percent to 3.5 percent for 2022. The IMF cited the same criteria stated earlier — the Russian invasion, chaos in the supply chain, global inflation, and the coronavirus. America is a global power, butwe are also affected by hundreds of other nations that are suffering through similar inflationary spikes at home. Ours is still a global economy that is impacted by world events.

The Bottom Line

Rather than recession, I see the U.S. headed toward another decent year and here’s why: Most economists look at job growth and spending as the two most important economic indicators that power the economy. Right now, millions of American consumers are driving the U.S. economy, fueled by jobs. Unemployment claims are at a 50-year low, indicating that businesses are not laying off workers. (Quite the contrary, finding, hiring and retaining employees has become the challenge.)

When unemployment is at a near-record low of 3.6 percent, and consumers are still spending from paychecks and considerable savings accounts, it is hard to have anything other than a robust economy. And most economists believe that the rest of this year will bring strong job growth, wage gains, and steady consumer spending.

On top of that, inflation may be ready to soften.

While creditable institutions like Bank of America and Deutsche Bank are prognosticating a recession either next year or in 2024, I do not believe a contraction of 1.4 percent is a harbinger of a recession this year. I admit that the outlook does not seem so bright from today’s lens. But our industry has had two great years, and though it will be marked by inconsistencies, 2022 should turn out OK.

Joe Higgins is a 43-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at