The U.S. economy retracted slightly in the first quarter as a rush of imported goods and fading fiscal stimulus led to a decline in gross domestic product (GDP), according to data released Thursday by the Bureau of Economic Analysis.
U.S. GDP shrank at an annualized rate of 1.4 percent during the first three months of 2022, according to the bureau’s first estimate of first quarter economic growth. Economists expected U.S. GDP to have fallen by an annualized rate of 1 percent — the first decline in economic growth since 2020.
“The first GDP contraction since the recession ended is sure to ignite fears that the economy is stalling out but on closer inspection, the report isn’t as worrisome as it looks,” wrote Lydia Boussour of Oxford Economics in a Thursday analysis.
“Beneath the weak headline print, the details of the report point to an economy with solid underlying strength and that demonstrated resilience in the face of Omicron, lingering supply constraints and high inflation.”
Consumer and business spending remained strong through the start of the year, a positive sign for the U.S. economy as it faces headwinds from inflation and pandemic-related supply shocks. But that spending helped fuel a surge of imports and a decline in business inventories, both of which detract from GDP. The expiration of pandemic aid programs, declines in government spending and a drop in exports also pushed the economy slightly backward on the whole.
“The economy is expanding at such a brisk pace that Americans turned to [external] sources to meet demand,” said Joe Brusuelas, chief economist at audit and tax firm RSM.
“This is what an overheating economy looks like,”
The drop in GDP comes amid growing concerns about a potential recession as the Federal Reserve races to fight inflation with a series of interest rate hikes. The Fed is aiming to raise rates fast enough to cool off the economy and the rapid inflation seen for more than a year without stopping economic and job growth all together.
The decline in GDP growth may not yet be a cause for alarm, according to some economists.
Personal consumption expenditures, a measure of consumer spending, rose at an annual rate of 2.7 percent in the first quarter, fueled by a 4.3 percent jump in spending on services and 4.1 percent increase in spending on durable goods.
Much of that spending, however, flowed overseas through higher purchases of imports, fewer exports and dwindling inventories. Exports, which add to GDP, fell at an annualized rate of 5.9 percent, while imports surged by 17.7 percent — the second consecutive quarter of 17 percent import growth or higher.
“Don’t panic. This is not the start of a recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a Thursday research note.
“The weakness in GDP growth was due to wild components.”
Private domestic investment, a sign of businesses expanding their operations, rose 2.3 percent, with a massive 15.3 percent increase in spending on equipment. Final sales to domestic purchasers, which doesn’t reflect trade flows, also rose 2.6 percent annualized on the quarter, up from 1.7 percent at the end of 2022.
Sturdy consumer and business demand could help propel what has been a resilient U.S. economy through several challenges, including rising inflation, the war in Ukraine and supply shocks driven by pandemic-related lockdowns. The U.S. economy added 1.7 million jobs during the first quarter despite the decline in GDP, and most economists believe the country will end the year with better-than-average growth.
Even so, spiking inflation and the long-run impact of the Fed’s rate hikes could weigh on the economy enough to risk a recession sometime in 2023. Annual inflation as measured by the personal consumption expenditures price index, the Fed’s preferred gauge, hit 7 percent in March and 5.2 percent without food and energy prices.
While there is no universally agreed upon standard for when an economy is in recession, the National Bureau of Economic Research typically considers it two consecutive quarters of negative GDP growth.
“The US economy will face an increasingly challenging backdrop amid high inflation, intensifying supply chain bottlenecks, and tighter Fed and fiscal policy but we expect it will show resilience and grow 3.1% this year before slowing markedly to 2% in 2023 as the Fed’s tightening cycle take its toll. But risks are tilted to the downside, and our yield curve models point to rising risk of a hard landing in 2023,” Boussour, of Oxford Economics, wrote.
Updated at 9:37 a.m.