Ignore the Headline: Focus on Business Investment

Posted by Jeffrey J. Roach, PhD, Chief Economist

Thursday, April 28, 2022

The U.S. economy shrank at an annualized rate of -1.4% in Q1, partially hindered by the COVID-19 Omicron variant during the first month of the year, but mainly due to a huge trade deficit.

Underlying demand from both consumers and businesses was quite resilient, given the headwinds of persistently high prices and Russia’s unjust invasion of Ukraine. Real final sales, which exclude trade and inventories, rose an annualized 2.6%, up from 1.7% in Q4. This is quite bullish for the fundamentals of the economy and will likely provide decent momentum heading into the rest of 2022. “Ignore the headlines for this specific report” explained LPL Financial Chief Economist Jeffrey Roach, “since the underlying details paint a very different picture.”

The largest drag on the economy in Q1 was the hefty trade deficit, dragging down headline growth by over 3 percentage points. Trade’s cut to headline growth was roughly as deep as the cut during the onset of the global pandemic. This negative impact will not likely repeat in the upcoming quarters as global sanctions stabilize. As we illustrate in the LPL Chart of the Day, real consumer spending and business capital spending contributed to growth in Q1 and we expect this to continue.

View enlarged chart.

Momentum in high frequency data in April suggests that the current and upcoming quarters of growth are consistent with our forecast of roughly 3% GDP growth for the year. Low weekly unemployment claims so far this month and early readings on April sentiment indicators all suggest budding momentum for the economy despite rising borrowing costs and quantitative tightening. April housing indicators from the National Association of Home Builders could foreshadow a slowing in residential investment, but the drag will not be meaningful for upcoming headline growth figures.

This report does not change our expectations that the Federal Reserve will likely hike 50 basis points in May and possibly in June and then begin a 25 basis point cadence.

In summary, stripping out the highly volatile exports and inventories, real final sales rose an annualized 2.6%, up from 1.7% in Q4. Even more bullish is the strength in nonresidential investment. Firms increased spending on items such as computers and machinery, and this will likely provide momentum for the rest of the year. Overall, nonresidential investment grew an annualized 9.2%.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

View All Posts