The U.S. economy contracted in the first quarter, but experts say the decline was largely the result of a record trade deficit, arguing that underlying economic data remains strong.
Gross domestic product (GDP), which is typically used as a proxy for economic growth, fell 1.4% in the first three months of the year. That’s quite a dip compared with the 6.9% jump in GDP from the final quarter of 2021.
In fact, it was the weakest quarter for GDP growth since the start of the pandemic in the spring of 2020. But economists say there’s more to the story.
“The first quarter was not as bad as it looks at first glance,” Bill Adams, chief economist for Comerica Bank, told Fortune. “Despite a decline in real GDP, it wasn’t a recessionary quarter: GDP fell and was much weaker than expected, but consumer spending growth was solid and fixed investment growth robust.”
The largest drag on the economy in the first quarter was the trade deficit, which reduced GDP by over three percentage points. A 2.7% reduction in government spending from a year ago also contributed to the weaker than expected GDP number.
But consumer spending, a main driver of the economy, rose at a 2.7% annual rate through March, accelerating from the end of last year.
“The Omicron variant temporarily stymied economic growth, especially in January, but underlying details show consumer spending was strong,” Jeffrey Roach, chief economist for LPL Financial, told Fortune. “Momentum in April suggests that the current and upcoming quarters of growth is consistent with our forecast of roughly 3% growth for the year.”
Roach noted that the latest GDP report showed nonresidential investment and capital expenditures—key indicators that show businesses are investing in their future growth—were on the rise as well, which he says should provide momentum for the rest of the year.
Businesses’ fixed investment, an economic measure that represents the spending by businesses to increase production capacity, also jumped at an annual rate of 9.2%. That should lead GDP to recover over the coming months as businesses’ production matches strong demand.
Economists surveyed by the Wall Street Journal estimate GDP will jump 2.6% in the final quarter of this year, matching 2019’s annual growth figures.
“Don’t freak out about the GDP report, the underlying inertial components were strong,” Jason Furman, an economics professor at Harvard and former economic adviser to President Barack Obama, said in response to the report. “Yes, there is a lot to be cautious and hedged about in the economy right now. But this report told me the trade deficit widened a lot in Q1, which is not one of the many variables I focus on in assessing worries about the economy.”
Furman noted that during his time at the Council of Economic Advisers, he focused on a key statistic called “private final domestic demand,” which measures the sum of final consumption and investment in the economy. That metric actually rose 3.7% in the first quarter.
“Considering that the core components of real GDP grew solidly in the first quarter, and payroll employment grew a robust 562,000 per month, the U.S. economy was not in a recession in the first quarter of 2022,” Comerica Bank’s Adams said.