An Update on US GDP and the Economic Effects of Russia’s Invasion of Ukraine

Economic Policy Brief #136 | By: Greg Ziegler | March 5, 2022

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107020839 1645799814253 gettyimages 1238751938 AFP 323X4K2 — ECONOMY Inflation will go higher, but Ukraine conflict likely won’t halt economic growth in the U.S.

Photo taken from: CNBC

Policy Summary

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The Bureau of Economic Analysis (“BEA”) released the second estimate of 2021 Q4 Gross Domestic Product (“GDP”) on Thursday, February 24^th. The first advanced estimate was released on January 27^th which showed fourth quarter growth in 2021 of 6.9% and third quarter growth in 2021 of 2.3%. The second estimate was consistent with the first advanced estimate and showed that GDP increased at an annual rate of 7% in the fourth quarter. This estimate is based on a more complete data set than what was available for the first advanced estimate.

The BEA stated that the increase in fourth quarter growth reflected the continued economic impact of the COVID-19 pandemic, and that in the fourth quarter, COVID-19 resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country. In a technical note accompanying the advanced estimate the BEA noted that several legislative acts, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act; and the American Rescue Plan (ARP) Act, (the “Acts”), provided temporary funding for existing federal programs to support individuals, communities, and businesses impacted by the pandemic.

Because the effects of the Acts were in the form of transfers to individuals, subsidies to businesses, and grants to state and local governments, their effects on GDP show up indirectly through components of GDP, such as consumer spending. In its technical note to the second estimate the BEA noted that the increase in GDP primarily reflected increases in private inventory investment, exports, consumer spending, and nonresidential fixed investment.

Policy Analysis

GDP is used as a gauge to measure the overall health of the economy and represents the value of all the finished goods and services produced in the United States. (For example, the economy is often considered to be in a recession after two consecutive quarters showing a decline of GDP)

Just as the economy is beginning to emerge from the economic effects of COVID-19, the United States economy, and the economies’ of all nations will face the effects of a war in Europe as Russia invaded Ukraine on February 24^th. The price of oil steadily ticked up as a Russian invasion became more and more certain. The price of Western Intermediate Crude (“WTI”) was $89.60 on 2/4, $90.61 on 2/11, and $92.89 on 2/18 closing at $92.81 on 2/24 (one year ago on 2/24/21 the price of oil was $63.53).

components of gdp explanation formula and chart 3306015 FINAL 969ea5e7cfdf4348a628c5dc70a2f4f6 — Components of GDP Explained

Photo taken from: The Balance

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The Automobile Association of America (“AAA”) stated that the national average for a gallon of regular gasoline has increased and that the increasing oil prices will continue to play a role in pushing prices higher.

As the war continues and additional economic sanctions are levied against Russia oil markets will continue to reflect the volatility in the world and the energy markets, the impact that these world events have on the United States economy is only just beginning to be seen.