The U.S. economy unexpectedly shrank at a 1.4% annualized rate in the first quarter of 2022, the Bureau of Economic Analysis reported Thursday, April 28. The first quarter results follow on a 6.9% growth rate in the fourth quarter. Economists had projected a 1% rate of growth for the quarter.
But since Wall Street was already expecting a big slowdown in growth for the quarter and because a peek below the headline numbers argued that the lower growth rate would be temporary, stocks surged on Thursday. The Standard & Poor’s 500 rose 2.47% on the day and the Dow Jones Industrial Average gained 1.85%. The NASDAQ Composite was ahead 3.06% and the NASDAQ 100 was up 3.48% on the day. The small cap Russell 2000 gained 1.80%.
A good part of the slowdown in GDP growth was a result of a drop in inventory purchases by businesses. Businesses reduced inventory purchasing because they had leftover goods from late last year when the Pandemic cut into sales and when companies stocked up on inventories to insure against supply chain turmoil.
The strength of the U.S. economy also led to a larger gap between U.S. exports and imports.
Together, the increase in the trade gap and the reduction in inventory buying subtracted about 4 percentage points from headline growth.
On the other hand, Wall Street was able to look to an alternative measure of economic activity for reassurance that the economy was stronger than it appeared in the GDP report. Real final sales to domestic purchasers, a measure of underlying demand that strips out the trade and inventories components, accelerated to a 2.6% annualized rate.