• Q1 GDP contracted…
  • ...mainly due to higher imports and cooler inventories...
  • ...but final domestic demand expanded at a healthy clip

US Q1 GDP, q/q %, SAAR:
Actual: -1.4
Scotia: 1.4
Consensus: 1.0
Prior: 6.9

US GDP landed materially weaker than most economists expected including us, unless you’d perhaps be so generous as to give us points for getting the number right despite the sign! That doesn’t mean the 1.4% annualized contraction should be ringing recession bells despite the first dip since the pandemic started (chart 1). Here’s why and details are here.

The main culprits behind the contraction were imports and inventories as shown in the break down of the weighted contributions to GDP growth in chart 2. Because imports surged by 17.7% y/y at a seasonally adjusted and annualized rate (SAAR), they dragged 2.5 percentage points off of top line GDP growth in terms of their weighted contribution to growth. Higher imports leak out of GDP and roll right out the door in an accounting sense, yet their surge is a positive reflection upon the ability of the domestic US economy to pull them in on the back of strength in consumption and investment.

Secondly, inventories dragged another 0.8 percentage points off of Q1 GDP growth. They fell by about 34.5 billion in Q1 after the prior quarter’s large 260 billion rise. GDP is flow based and so the swing from inventory investment to disinvestment dragged on GDP.

Combined, inventories and imports knocked 3.3 percentage points off of GDP growth. Technically we cannot just remove these effects and say if not for it then GDP would have ben up by almost 2%. That’s because of the connections between all of the parts of the economy in that higher imports were due to strength in the domestic economy and inventories were depleted not just because of supply chain problems that hampered restocking efforts but also by higher demand.

That said, one way of looking at the strength of the domestic economy in isolation of trade and inventory linkages is shown in chart 3. Final sales to domestic purchasers, or final domestic demand, adds up consumption, investment and government spending. This figure grew by 2.6 ppts q/q SAAR in Q1 and reflects a strong domestic economy able to pull in more imports. I think it would have been hotter if not for product shortages.

As for inventories, they remain very lean despite prior progress toward addressing shortfalls (chart 4). Chart 5 shows the economy-wide inventory to sales ratio across manufacturers, retailers and wholesalers and how lean they remain. The same chart shows just retailers. Chart 6 shows retailers ex-autos that are also lean.

Charts 7–13 break down retail inventory-to-sales ratios by most retail sectors. The lean conditions are not just in autos. Apparently clothing, eating and drinking all remain optional. Other categories have restocked compared to a few months ago which may be part of why inventory investment eased overall, but there remains more work to be done.

Still, tracking had pointed to a stronger contribution from consumption but the 2.7% q/q SAAR gain was still very respectable. The economy is also seeing the rotation toward investment contributions with much more to come at capacity limits.


This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.

These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.

Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.

Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.

This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.

™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.

Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.

Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.

Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.