US real gross domestic product (GDP) shrank at a 1.5% annual rate during the first quarter, more than the preliminary estimate of -1.3%, the Commerce Department reported on May 26. The worst trade performance on record took 3.2% off GDP, more than accounting for the entire drop. Nothing like this has happened before.
Personal consumption rose at a 3.1% annual rate but the additional demand was more than met by increased imports.
America’s trade deficit in goods spiked to $128 billion in March, or an annual rate of 1.54 trillion, while US manufacturers’ sales plunged after adjustment for inflation. In real terms, US factory sales have fallen by nearly 10% since 2018, and by nearly 20% since 2007.
Consumers spent the lion’s share of the $6 trillion Covid stimulus on imports. That’s another first: US manufacturing never contracted in the past following a big increase in demand.
Net exports took 3.2% off GDP growth only once before, in 1982 but that happened while GDP was booming. Americans typically import more when the economy expands, and import less when it contracts, simply because there is less overall demand in a shrinking economy.
This is the first time that net exports went sharply negative while GDP was falling, and the first time that negative net exports caused a drop in GDP.
The biggest increase in US imports came from China, which shipped 55% more to the United States in April 2022 (in seasonally-adjusted dollar terms) than it did in August 2019, when then-president Trump slapped 25% tariffs on most Chinese imports.
There are several reasons for the implosion of American manufacturing in the course of the Covid epidemic.
First, the $6 trillion stimulus took millions of Americans out of the workforce, leading to a labor shortage.
Second, supply shocks including the semiconductor shortage and transportation bottlenecks restrained factory activity.
Third, China’s strong supply chains and robust manufacturing ecosystem attracted more foreign investment than ever from US companies such as Tesla, accelerating the shift out of onshore manufacturing.
These factors underscore the causes of US inflation, officially reported at around 8%, but closer to 12% when undercounting of shelter inflation is factored in.
Prices are rising because of constraints on supply: Not enough workers, not enough transportation, not enough industrial investment, and constraints on hydrocarbon production imposed by the Biden administration.
Raising interest rates won’t have much impact on inflation, unless the Federal Reserve hikes them enough to throw the United States into recession. Then Americans will buy less and some prices will come down.
But a recession would only aggravate the underlying causes of US inflation: Inadequate capital investment, inadequate infrastructure and inadequate training for skilled factory jobs.
Follow David P. Goldman on Twitter at @davidpgoldman