The US Commerce Department reported on Thursday that US gross domestic product (GDP) fell 1.4 percent in the first quarter of this year. This is the first time the economy has shrunk since the COVID-19 pandemic plunged the US into a steep, if short, recession two years ago. And the fall defies the bullish projections for the quarter that, even at their most muted, had estimated a 1 percent gain.

The numbers are, to state the obvious, not good. But mainstream commentary is brushing them away. The dominant narrative is that yes, the economy shrank as the trade deficit ballooned. But demand – measured in expenditures and investment – remains high. And those are the more important indicators for economic growth, or so goes the prevailing wisdom.

But the opposite is true. This commentary absolutely ignores the reality of the challenges facing today’s American economy and its fundamentals. Breaking down the Commerce Department numbers reveals that the mismatch in the domestic economy between demand and supply is extreme, worsening, and dragging performance down with it. As anyone who has ever run out of gas knows, demand is not enough to keep moving forward. This needs to be realized so the US can invest, effectively, in supply. Otherwise, we’re going to see a lot more economic contraction ahead.

The primary reason for the fall in GDP this quarter was the trade deficit. Exports plummeted as imports grew: The US is consuming more than it is producing, while also failing to produce what the rest of the world is consuming.

The optimistic take is first, that Washington sits at the perfect inflection point to adjust economic policies that contributed to this imbalance – and, second, that early indications suggest the private sector may already be taking the lead, whether Washington adjusts or not.

The factors that pushed GDP up, avoiding even greater contraction, were demand-driven: Personal consumption expenditures grew at a rate of 2.7 percent, with that growth driven by spending on services rather than goods. In other words, the US is spending more and making less; is out of equilibrium on the supply-demand chart. As a result, the economy is failing to grow.

Of course, there is, as there always is, a silver lining here. It just doesn’t lie in the demand figures. Rather, the optimistic take is first, that Washington sits at the perfect inflection point to adjust economic policies that contributed to this imbalance – and, second, that early indications suggest the private sector may already be taking the lead, whether Washington adjusts or not.

Part of the reason demand is so disproportionately high is that government stimulus spending related to the pandemic has allowed it to be. US measures in response to COVID-19 have been almost entirely demand-side, propping up consumption but doing little to resolve deficits of production on the supply side. Now, stimulus spending is fading out. This gives Washington the chance to turn from band-aid policy to addressing macroeconomic fundamentals for the long term, including measures that may amount to industrial policy. And with these steps it will be apparent that supply is the ready answer to many of the major challenges facing the government and the macroeconomic environment right now – whether inflation and shortages of goods, the imperative of assisting Ukraine, the industrial competition with China, or the energy revolution.

Of course, Washington should recognize as much. But the private sector has a role to play, and perhaps a greater one. And the Department of Commerce’s figures suggest that maybe companies are stepping up: This quarter, business investment increased by 9.2 percent, as businesses allocated more money to equipment and research and development.

Business investment is a broad, sweeping indicator. It could mean any number of things, some of them effective and others not. But among those is the possibility that the private sector has recognized the economic imperative to produce and is allocating resources accordingly.

These latest GDP numbers were not good. We should not fool ourselves into thinking otherwise. What we should do is recognize where we have failed, and fix that – while there is still time.

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