☷Economy Statement by Benjamin Harris Assistant Secretary for Economy Policy for the Treasury Borrowing Advisory Committee
U.S. Department of the Treasury ( By Press Release office)
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WASHINGTON - Real GDP growth declined in the first quarter of 2022 , following a rapid acceleration of 6 . 9 percent in last year’s final quarter . The outright decline in real GDP was driven by sharp swings in the contributions of net exports and inventory investment , two components which had added strongly to growth in the fourth quarter . However , underlying private demand grew accelerated in the first quarter relative to the second half of 2021 . Private demand grew at a healthy rate despite a backdrop which included a resurgence of COVID - 19 cases from the Omicron variant , expectations of tightening monetary policy , and Russia’s invasion of Ukraine and its impacts on sentiment and prices for oil and food . Labor market conditions improved further during the first quarter of 2022 , after making record gains in 2021—including the largest advance in payroll job creation , and the largest drops in the headline and the U - 6 ( broadest ) unemployment rates in a calendar year . With jobs plentiful and workers in short supply , strong nominal wage gains are drawing more workers back into the labor force . However , supply - demand mismatches in the economy have driven headline—as well as core—inflation higher thus far in 2022 . Rising inflation in 2021 reflected supply - demand imbalances , partly due to elevated demand from high household savings and partly related to supply - chain disruptions . These factors continue to influence prices this year , and headline inflation has been further elevated by rising prices for energy and grains related to Russia’s invasion of Ukraine . Still , core inflation may have peaked in spring 2022 and started to ebb , given a further waning of the pandemic , government efforts to contain energy prices , and an easing of supply bottlenecks in some markets . GDP GrowthAccording to the advance estimate released last Thursday , real GDP declined by 1 . 4 percent at an annual rate in the first quarter of 2022 , following an unusually rapid 6 . 9 percent jump in the final quarter of 2021 . The slowdown in the first quarter reflected greater domestic demand for imports , higher prices and weaker demand for U . S . exports , slower growth of private inventories , and higher prices for government spending . By contrast , private domestic demand strengthened in early 2022 . Real private domestic final purchases ( PDFP ) —the sum of personal consumption , business fixed investment , and residential investment—accelerated to 3 . 7 percent at an annual rate during the first quarter , following a 2 . 6 percent advance in the fourth quarter . By stripping out international trade , government spending , and the volatile inventory component , PDFP is typically a stronger indicator of future GDP increases and represents the private sector’s capacity to generate self - sustaining growth . Real personal consumption expenditures ( PCE ) —the largest component of PDFP and roughly two - thirds of real GDP—rose by 2 . 7 percent in the first quarter on an annualized basis , up slightly from the 2 . 5 percent increase in the fourth quarter . The first - quarter advance reflected an acceleration in consumption of services , which grew by 4 . 3 percent and more than offset a 0 . 1 percent decline in goods purchases . The negligible decline in goods consumption reflected higher purchases of durable goods ( particularly of motor vehicles and parts ) being fully offset by lower spending on real nondurables—notably gasoline as demand adjusted to the sharp jump in gas prices during the first quarter . Meanwhile , the continued recovery in services PCE was led by spending on health care services but also reflected strong growth in imputed categories such as shelter and financial services . In addition , consumers returned to pandemic - sensitive sectors , such as travel and recreation services , as the Omicron wave faded throughout the quarter . However , despite the strong growth in services PCE in the first quarter , the composition of total PCE remains weighted more heavily toward goods than services: as of the first quarter of 2022 , goods PCE was still over 6 percent higher than the pandemic ( 2015 - 2019 ) trend . By contrast , PCE services was still 4 percent below trend . Business fixed investment ( BFI ) jumped up by 9 . 2 percent at an annual rate in the first quarter , following a 2 . 9 percent gain in the fourth quarter . Investment in structures remained a drag on growth—albeit a negligible drag—as it slipped just 0 . 9 percent in the first quarter after dropping by 8 . 3 percent in the fourth quarter . Investment in mining - related structures , including oil and gas wells , continued to rise due to rising energy prices . Meanwhile , surging investment in business equipment and intellectual property products outweighed the slight decline in structures . Equipment investment rose 15 . 3 percent at an annual rate in the first quarter , and investment in intellectual property products increased 8 . 1 percent at an annual rate in the first quarter . Real residential investment—the third and final component of PDFP—rose by 2 . 1 percent at an annual rate in the first quarter , following a 2 . 2 percent increase in the previous quarter . As of the early 2022 , residential investment was nearly 7 percent above its pre - pandemic trend—even as construction prices have risen sharply since mid - 2020 . Higher construction costs have been driven in part by disruptions in supply chains for materials as well as shortages of labor . The change in private inventories ( CIPI ) , a volatile component , posed the second - largest drag on real GDP growth in the first quarter , subtracting 0 . 8 percentage points , a sharp contrast with the 5 . 3 percentage - point addition made in the fourth quarter . Although businesses continued to build inventories in the first quarter at a healthy clip , it was at a slower pace than in the fourth quarter . Inventories tend to be a volatile component of GDP; in the first quarter , the slowdown was led by decreases in inventories of wholesale durables trade and other retail stores , which was partly offset by stronger buildup in manufacturers’ inventories . The trade deficit widened by $191 . 6 billion to $1 , 541 . 7 billion in the first quarter , which imposed the largest drag ( 3 . 2 percentage points ) of any component on GDP growth . Total exports of goods and services dropped by 5 . 9 percent at an annual rate , while total imports of goods and services jumped 17 . 7 percent . Nominal exports rose in the quarter , but real exports fell on a sharp increase in the export price index . Total government spending declined 2 . 7 percent at an annual rate in the first quarter , nearly matching the decline in the previous quarter . Federal government consumption and investment accounted for about 80% of the decrease , largely concentrated in national defense purchases—defense spending contracted by 5 . 9 percent , the fourth consecutive quarterly loss . State and local government consumption declined 0 . 8 percent in the first quarter , half the decline in the fourth quarter . Like exports , these real declines reflected large increases in price index for government consumption and investment . Labor Markets and WagesIn 2021 , U . S . labor markets realized robust employment gains and the largest calendar - year drop in the unemployment rate on record; labor market improvement continued during the first quarter of 2022 . After generating a record 6 . 74 million payroll jobs in 2021 , the economy added another 1 . 69 million during the first quarter of 2022 . As of March , a total of 20 . 4 million jobs have been recovered during the current recovery , or 93 percent of those lost during the two - month recession in early 2020 . Meanwhile , the headline unemployment rate dropped by a record 2 . 8 percentage points over 2021 to 3 . 9 percent . By March , it had fallen further to 3 . 6 percent , just one - tenth above the half - century low of 3 . 5 percent registered before the pandemic . The broadest measure of unemployment—the U - 6 rate , a measure of labor underutilization that includes underemployment and discouraged workers in addition to the unemployed—also dropped by a record amount ( - 4 . 4 percentage points ) last year . In the first quarter , the U - 6 fell an additional 0 . 3 percentage points to 6 . 9 percent and , by March , was just one - tenth above its pre - pandemic low of 6 . 8 percent . The long - term ( 27 or more weeks ) unemployment rate , expressed as a percentage of the labor force , also declined sharply last year . As of March 2022 , this rate was 0 . 9 percent , or just 0 . 2 percentage points above the pre - pandemic low . Recovery in the overall labor force participation rate ( LFPR ) was somewhat restrained in 2021 , related in part to the multiple COVID - 19 variants that arose during the year and slower population growth due to increased mortality rates and lower immigration . During the first half of 2021 , total LFPR increased by only 0 . 1 percentage points and by another 0 . 3 percentage points during the latter half . Yet recovery in the LFPR picked up again in this year’s first quarter . As of March 2022 , the headline LFPR had climbed another 0 . 5 percentage points to 62 . 4 percent , or 1 . 0 percentage point below the 63 . 4 percent rate reached in early 2020 . For prime - age ( ages 25 to 54 ) workers , the LFPR saw much of its 2021 growth in the first half of the year , rising by 0 . 7 percentage points to 81 . 7 percent . Thereafter , it was rangebound between 81 . 6 percent and 81 . 9 for six months . However , the prime - age LFPR saw a remarkable recovery in the just the first quarter of this year . As of March 2022 , this measure had climbed 0 . 6 percentage points to 82 . 5 percent , matching the rate in March 2020 and just 0 . 6 percentage points below the high of 83 . 1 percent reached in January 2020 . Progress in participation for older workers has been slower . For those older than 55 years of age , the LFPR stagnated during 2021 , ending the year 0 . 1 percentage points lower . In the first quarter of 2022 , their LFPR increased by 0 . 4 percentage points to 38 . 9 percent , but this is still more than a full percentage point below the 40 . 1 percent average rate from 2016 to 2019 . Further progress in older worker LFPR could support employment growth in 2022 . By some measures , labor markets are even tighter than what headline statistics suggest . According to the Job Openings and Labor Market Turnover Survey ( JOLTS ) , labor demand has been at or near record highs since February 2021 . Prior to the pandemic , the number of job openings peaked at 7 . 42 million at the end of October 2019 . By the end of February 2022 ( latest available date ) , job openings were 11 . 27 million . Combined with the somewhat slow recovery in LFPR , labor supply is not keeping pace with labor demand , which has enhanced workers’ confidence about job mobility as well as their leverage in wage negotiations . By the end of February 2022 , there were 4 . 35 million job quits ( 2 . 9 percent of employment ) , higher by nearly three - quarters of a million from the pre - pandemic high . This favorable labor market for workers has led to strong growth in nominal wages . For production and nonsupervisory workers , nominal average hourly earnings increased 6 . 7 percent over the year through March 2022; twelve - month gains in this measure have remained well above 6 . 0 percent in each of the past six months . The Employment Cost Index ( ECI ) , which better controls for changes in labor composition and is a more comprehensive measure of total compensation , showed private sector wages increasing 5 . 0 percent over the four quarters ending in March 2022 , matching the previous quarter’s twelve - month pace as the fastest since the first quarter of 1984 . Lower wage occupations and industries continue to see the fastest growth in wages . In leisure and hospitality industries , the ECI for private wage growth jumped 9 . 0 percent over the year ending in the fourth quarter of 2021 , while the retail trade ECI was 7 . 4 percent higher . Wage growth appears to be outpacing productivity growth , likely contributing to inflation . PricesInflation picked up markedly in 2021 and continued to accelerate earlier this year . Over the four - quarters of 2021 , the Consumer Price Index ( CPI ) rose 7 . 0 percent . The CPI for energy goods and services , which surged 29 . 3 percent over the year , accounted for roughly a third of year - over - year headline inflation as companies scaled back production due to uncertain demand during the pandemic . Food prices—which were subject to rising energy prices and wages , as well as supply - chain disruptions—rose 8 . 8 percent over the year and contributed another 12 percent to headline inflation . Meanwhile , core CPI—which excludes the volatile categories of food and energy that are often subject to temporary shocks—increased 6 . 5 percent as demand recovered more quickly than supply . Demand has been boosted by high saving rates during the pandemic as well as federal government pandemic support programs . In addition , supply has not been able to keep pace with demand , due in part to supply - chain disruptions as well as a delayed return of many workers to the labor market . This brisk pace of growth continued into the first quarter of 2022 . The CPI for all items accelerated in each month , surging 1 . 2 percent in March . Russia’s invasion of Ukraine exacerbated headline inflation as it severely disrupted energy supply: the price of West Texas Intermediate advanced 13 percent from the end of February through mid - April and U . S . retail gasoline price increased 17 . 2 percent through the end of March . Supplies of grain from Russia and the Ukraine have also been disrupted , which is likely to exacerbate already - rapid food price inflation . While there has been some easing of oil and gasoline prices in recent weeks , food prices are likely to remain elevated for some time . At the core level , the CPI slowed to 0 . 3 percent in March as high prices reduced demand for some goods . In 2021 , motor vehicle prices were a significant contributor to core inflation , reflecting low inventories and supply chain disruptions; but in recent months , motor vehicles prices have eased as used vehicle prices have fallen . Even so , shortages in a variety of goods persist , owing to port backlogs and other shipping delays . For services , solid inflation has persisted as surging house prices and rising rents have together pushed up the shelter price index , households have returned to pandemic - sensitive consumption , and tight labor markets have pushed up wages . The PCE price index assigns different weights for different components than does the CPI and uses a different methodology in its calculation . Nonetheless , the drivers of both measures have been similar . As with the CPI , the headline PCE accelerated to 0 . 9 percent in March , but the core PCE measure decelerated , rising 0 . 3 percent in March . Housing MarketsThroughout 2021 , housing market developments reflected an imbalance between supply and demand , driving rapid home price growth and eroding affordability . The Case - Shiller national house price index—which measures sales prices of existing homes—was up 20 . 2 percent over the year ending in February 2022 , a sharp acceleration from the 12 . 1 percent and 3 . 5 percent rates seen in February 2021 and February 2020 , respectively . The FHFA house price index rose 19 . 5 percent over the year ending in February 2022 and showed comparable accelerations over the previous two years . Both indices have risen above 1 percent on a monthly basis since August 2020; in February , growth in both indices was above 2 percent . Supply in the housing market is being constrained by rising mortgage rates and ongoing supply chain issues , such that the outlook for future housing supply is mixed . Single - family housing starts were down by 1 . 7 percent in March 2022 , and single - family permits , which signal future starts , declined by 4 . 6 percent in the same month . Home builder sentiment has also deteriorated so far this year: after rising during the last four months of 2021 , the National Association of Home Builder’s confidence index has declined during the first four months of 2022 , dropping to 77 in April 2022 , 13 points below the record high of 90 reached in November 2020 . On the other hand , single - family starts were stable over the first quarter , and single - family permits were up 2 . 0 percent , suggesting a small increase in forthcoming supply in this segment of the market . In addition , the total number of homes under construction at the end of 2021 ( single - family and multi - family ) was at its highest level since 1972 , while the number of new housing units that have been authorized , but not yet started ( i . e . , the backlog of new construction ) continued its upward trend , hitting a fresh all - time high of 280 , 000 units ( data begin in 1999 ) . Sales of homes continued to trend lower during the first quarter of 2022 . In March , existing home sales—which account for 90 percent of all home sales—declined 2 . 7 percent over the month and were down 4 . 5 percent over the year . After jumping by double - digit rates last November and December , new single - family home sales have declined in each month of the first quarter , falling by 8 . 6 percent in March . Existing and new home sales were lower by about 430 , 000 on net over the first quarter , after declining by about 600 , 000 over the year ending December 2021 . After reaching an all - time low last December , existing home inventories rose to a still - low 950 , 000 homes on the market , the equivalent of 2 . 0 months of sales in March . The inventory of new single - family homes available for sale moved even closer to a balanced market , rising to 407 , 000 homes in March—equivalent to a 6 . 4 - month supply . Realtors consider a 7 - month supply to be consistent with a balanced market . Risks to the OutlookThere are multiple downside and upside risks to the economic outlook . Primary among the downside risks are concerns about the pandemic , commodity and energy prices , and shelter costs , while a stronger than expected return to the labor force may help wage pressures on inflation . Pandemic: Since the first quarter Economy Statement to the Treasury Borrowing Advisory Committee , the Omicron variant firmly established itself in the United States , but symptoms and deaths were less severe than from previous variants , likely due to the number of vaccinations as well as previous levels of infections . Although Omicron affected economic growth in January and February , households quickly returned to travel and social recreational activities in March , and firms started to call workers back into the office . In addition , the mask mandate has been also lifted since the previous TBAC statement , and the director of the National Institute of Allergy and Infectious Diseases ( NIAID ) and the Chief Medical Advisor to the President has suggested that the United States is transitioning to a “control phase” of the pandemic . Still , persistence of the pandemic endangers the recovery of supply - chains , particularly in countries that have less immunity via infection or vaccination . Continued lockdowns in China have resulted in production losses and shipping delays , which could keep goods prices elevated; and price pressures could persist if additional coronavirus variants prove more resilient against current vaccines and treatments . Moreover , the pandemic has negatively affected labor supply and population growth . To the extent that these losses are permanent , potential economic growth has been shifted lower . Commodity Prices and Their Volatility: In February , Russia’s invasion of Ukraine disrupted markets , causing energy , food , and other commodity prices to rise . In the first weeks of Russia’s invasion of Ukraine , U . S . gasoline prices jumped by 78 cents ( 22 percent ) while futures prices for St . Louis wheat increased by $2 . 11 ( 23 percent ) . Although energy prices have stabilized to some extent , especially for gasoline , the persistence of these disruptions could imply higher energy and commodity prices in the future , especially as U . S . production may be slow to ramp up . Prior to Russia’s attack on Ukraine , the Energy Information Agency had already predicted that U . S . domestic oil output would trail pre - pandemic production by about 500 , 000 per day . In addition , the planted area for all varieties of wheat grown in the U . S . hit a record low during the 2020/2021 marketing year and is projected to increase only incrementally during 2021/2022 and 2022/2023 . Shelter costs: House prices and rents are out of sync . Since owning a home and renting an apartment are imperfect substitutes , prices and rents tend to be in long - run equilibrium . Yet given current house valuations , the price - to - rent ratio has risen sharply to 1 . 5 , an historically high ratio , suggesting an imbalance in pricing between types of shelter . Labor Force Participation: In the first quarter , labor force participation increased more quickly than it had in the second half of 2021—rising by 0 . 5 percentage points and 0 . 6 percentage points among prime - age workers . A tight labor market and strong wage growth is likely contributing to the return to the workforce as well as greater worker comfort with in - person interactions as the severity of the pandemic wanes . To the extent that labor supply continues improving at the pace seen in recent months , wage pressures on inflation may ease . ConclusionAlthough real GDP growth declined by 1 . 4 percent at an annual rate in the first quarter of 2022 , there was a significant increase in the growth of PDFP to 3 . 7 percent , attesting to the strength of private demand . As of May 2022 , the United States is still in expansion , even though growth in January and February was affected by the Omicron variant and other factors . Before the release of the first quarter GDP reading , private forecasts expected U . S . economic activity would return to its trend path late this year and GDP would grow 2 . 3 percent on a fourth - quarter over fourth - quarter basis . Although this estimate may be revised down—and downside risks remain to the outlook—the U . S . economy is expected to continue its expansion this year . Waning fiscal and monetary stimulus along with recovering labor supply should help balance labor markets and relieve some inflationary pressures .
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