US GDP fell at a rate of 1.4% to start the year as pandemic recovery takes a dent


Gross domestic product unexpectedly fell 1.4% year-on-year in the first quarter, marking an abrupt turnaround for an economy that recorded its best performance since 1984, the Commerce Department reported Thursday.

The negative growth rate even missed the moderate Dow Jones estimate of a 1% gain for the quarter. GDP measures the output of goods and services in the US for the three-month period.

A plethora of factors worked together to counteract growth in the first three months of 2022, which fell off a cliff after the 6.9% gain ended last year.

“In retrospect, this could be seen as a pivotal report,” said Simona Mocuta, chief economist at State Street Global Advisors. “It reminds us of the reality that growth has been great, but things are changing and will not be as great in the future.”

Despite the disappointing numbers, markets paid little attention to the report, with stock futures pointing to a higher open on Wall Street. Part of the decline was due to a number of factors likely to reverse later in the year, raising hopes that the US can avoid a recession.

Rising Covid-omicron infections to start the year hampered activity across the board, while inflation rose to levels not seen since the early 1980s and the Russian invasion of Ukraine also contributed to economic growth. stagnation.

Prices rose sharply during the quarter, with the GDP price index deflator rising 8%, following a 7.1% jump in the fourth quarter.

The decline in growth was the result of a slowdown in investment in private inventories, which helped fuel growth in the second half of 2021. Other constraints came from state, federal and local government exports and government spending, as well as rising imports.

An 8.5% slump in defense spending was a particular drag, cutting a third of a percentage point of final GDP value.

Consumer spending held up reasonably well in the quarter, rising 2.7% as inflation kept prices under pressure. However, a rapidly growing trade deficit reduced growth by 3.2 percentage points as imports outweighed exports.

“This is noise, not a signal. The economy is not in recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Net trade has been plagued by a surge in imports, especially of consumer goods, as wholesalers and retailers have tried to rebuild inventories. This cannot last much longer, and imports will eventually decline completely and net trade GDP growth will be in Q2 and/or Q3.”

While recession expectations on Wall Street remain low, there are further problems for the economy: In an effort to curb rapid price increases, the Federal Reserve plans to implement a series of rate hikes to further slow growth. The personal consumption price index, excluding food and energy, a preferred inflation measure by the Fed, rose 5.2% in the quarter, well above the central bank’s inflation target of 2%.

Current market prices represent the equivalent of 10-quarter percentage point interest rate movements that would bring the Fed’s benchmark rate to about 2.75% by the end of the year. That comes after two years of near-zero interest rates aimed at a recovery from the steepest recession in US history.

In addition, the Fed has halted its monthly bond-buying program to keep interest rates low and keep money flowing through the economy. The Fed will begin shrinking its current bond holdings as early as next month, slowly at first and eventually at a pace expected to reach $95 billion a month.

While economists largely still expect the US to evade an outright recession, risks are mounting.

Goldman Sachs sees about a 35% chance of negative growth in a year. In a forecast that is an outlier on Wall Street, Deutsche Bank sees the potential for a “significant recession” to hit the economy in late 2023 and early 2024, the result of a Fed that will need to tighten much more to curb inflation than forecasters currently anticipate.

All of this comes after a year in which GDP grew 5.7%, the fastest since 1984. While consumer spending, which accounts for nearly 70% of the US economy, drove growth in the first half of 2021, a rebuilding of the inventories since depleted pandemic levels have been responsible for nearly all of the growth in the last two quarters of the year.

Sustaining that growth into 2022 will require an easing of congested supply chains and some resolution in Ukraine, both of which will come under pressure from higher interest rates, not only from the Fed, but also from global central banks that a similar battle against inflation.

Correction: The decline in growth was due to a slowdown in private stock investment, which helped boost growth in the second half of 2021. An earlier version displayed the wrong year.

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