Myth #3: The U.S. economy has struggled since inflation increased in 2021. The Reality: Economic growth and the job market have remained strong since the economic recovery began in 2020. Inflation, not economic growth or employment, has been the problem for the U.S. economy. Economic Growth The table below shows quarterly and annual economic growth over the past five years when economic output is compared to the previous period. The Bureau of Economic Analysis (BEA) began tracking quarterly GDP growth data in 1947. The economic recovery that began in the second half of 2020 follows the worst quarterly decline on record, a drop of 31.2% in the second quarter of 2020. The 2020 second quarter decline was much greater than the worst quarterly decline during the financial crisis which was 8.5% in the fourth quarter of 2008. The 2020 economic recession (two consecutive quarters of negative GDP growth) was the shortest on record according to the BEA. The 3.4% decline in 2020 was the largest decline in annual economic growth since 1946. During the financial crisis the largest annual economic growth decline was 2.6% in 2009. Consistent, strong, quarterly economic growth returned in the second half of 2020. Economic growth was temporarily tempered by a COVID resurgence in the third quarter of 2021, but the strong growth returned in the fourth quarter at a rate of 6.9%. Annual GDP growth in 2021 was 5.7%, the strongest annual growth since 1984.
Percent Change from Previous Period in Real GDP – Annualized Rate (Source: Bureau of Economic Analysis) Q1 Q2 Q3 Q4
Annual
2017 2018 2019 2020 2021
1.9 3.1 2.4 -5.1
2.3 3.4 3.2
2.9 1.9 2.8
3.8 0.9 1.9 4.5 6.9
2.3 2.9 2.3
-31.2
33.8
-3.4
6.3
6.7
2.3
5.7
Economic growth declined at an annualized rate of 1.4% in the first quarter of 2022, a significant reversal of the prior year’s strong growth. To understand the economic growth reversal, the table below shows how changes in the four components of GDP contributed to the change in U.S. economic growth over the past three quarters. Over the past three quarters, the contribution of consumer spending to economic growth ticked up as the economy rebounded, and first quarter consumer spending remained relatively strong. Investment spending, particularly the build-up of business inventories, was extremely strong in the fourth quarter of 2021. Investment spending contributed to economic growth in the first quarter of 2022, but the contribution was significantly less (as expected) as inventories declined. Government spending had a modest impact on the first quarter economic decline. The primary driver of first quarter economic decline was an increasing trade deficit, as U.S. demand for imports significantly exceeded U.S. exports. The increased trade deficit contributed to a 3.20% decline in first quarter economic growth and was the most significant component of GDP causing the economic reversal. The U.S. trade deficit surged to a record $74.4 billion in March due to multiple factors, including a U.S. economy that recovered more robustly than foreign economies, and uploading of imports by business to avoid supply uncertainties created by the Russian invasion of Ukraine.
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Center for Business and Economic Insight
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