The U.S. economy didn’t just get off to a slow start in 2022, it slammed on the brakes—at least on paper.
- The U.S. economy shrank for the first time since the initial crush of the COVID-19 pandemic, declining 1.4%.
- A large trade deficit was a big factor in the decline, but economists said it was more important that consumer spending held up well in face of soaring inflation and other challenges.
- The big question now is how consumer spending—the engine of economic growth—will fare in future quarters amid fallout from the war in Ukraine and higher interest rates.
Inflation-adjusted gross domestic product shrank 1.4% in the first quarter, the Bureau of Economic Analysis said Thursday in releasing its first estimate of the seasonally adjusted annual rate of change. The decline was worse than economists expected: A slowdown from the unusually big 6.9% growth in the fourth quarter was a given, but the consensus forecast was for 1% growth, not a decline.
One of the main reasons for the dropoff was a massive gap between what we imported to the country versus what we shipped out. Imports rose 18% while exports fell 5.9% as demand for American products, especially in China, fell amid COVID-19 lockdowns and the war in Ukraine. Businesses also invested less in inventory than they did during an unusually active fourth quarter.
While shrinking GDP could suggest a decline in the standard of living, much of the underlying data was actually encouraging, economists said, showing how resilient people were in the face of the omicron surge in COVID-19 cases earlier in the year as well as ongoing shortages and rapid price increases for food, gasoline, and many other items. In fact, the fastest growth in consumer spending and fixed business investment in three quarters shows the economy is definitely not in a recession, many said—not yet anyway. Plus, employers are still eager to hire (and reluctant to fire).
“The most important aspects of the domestic economy held up better than they did at the end of 2021, when growth was soaring,” Diane Swonk, chief economist at Grant Thorton, said in a commentary.
Consumer spending—the largest contributor to GDP—increased 2.7% while businesses’ investments in things like buildings, equipment, and intellectual property grew 9.2%.
The outlook for future economic growth is muddier. Many economists expect GDP to grow again in the second quarter, but powerful forces are threatening to sabotage that all-important consumer spending engine, economists said. Shortages continue to tangle supply chains, and the war in Ukraine has only made things worse. Inflation is seriously hurting household budgets.
Not only that, but the Federal Reserve’s medicine for the inflation problem—raising its benchmark interest rate to discourage borrowing, spending and, in turn, price hikes—could go too far in hurting economic growth.
“Consumer spending is downshifting, and it will downshift going forward—especially late this year through next year once we see a more material interest rate increase from the Fed,” said Sal Guatieri, senior economist at BMO Capital Markets. Still, the report “doesn't change our view that the economy will continue to grow this year—and even next year—albeit at a much slower pace than the rebound last year.”
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