US GDP’s contraction deeper than thought

Consumer spending growth lowered

WASHINGTON: The US economy contracted slightly more than previously estimated in the first quarter as the trade deficit widened to a record high and a resurgence in Covid-19 infections curbed spending on services like recreation.

The Commerce Department’s third estimate of gross domestic product on Wednesday also showed some underlying softness in the economy, with consumer spending revised lower and inventories higher than reported last month.

GDP fell at a 1.6% annualised rate last quarter, revised down from the 1.5% pace of decline reported last month. That was the first drop in GDP since the short and sharp pandemic recession nearly two years ago.

Economists polled by Reuters had forecast the pace of contraction would be unrevised at a 1.5% rate.

The economy was initially estimated to have contracted at a 1.4% rate. It grew at a robust 6.9% pace in the fourth quarter.

Consumer spending, which accounts for more than two-thirds of the economy, grew at a 1.8% rate instead of the 3.1% pace reported last month.

The downgrade reflected revisions to services, now estimated to have increased at a 3.0% rate instead of the previously reported 4.8% pace.

Spending on recreation, financial services and insurance as well as health care was downgraded.

Outlays on goods meant to last three years or more increased at a 5.9% pace, slashed from the previously reported 6.8% rate. That reflected downgrades to motor vehicles and recreational goods spending.

The moderate pace of spending left inventories significantly higher than estimated in May.

Business inventories increased at a $188.5 billion rate, rather than the $149.6 billon pace reported last month.

Slower consumer spending was partially offset by stronger business investment in equipment, whose growth pace was raised to 14.1% from 13.2%.

As a result, growth in final sales to private domestic purchasers, which excludes trade, inventories and government spending, was cut to a 3% rate last quarter.

Revisions to corporate profits were minor. The saving rate was unrevised at 5.6%. The increase in personal income was little changed from May’s estimate.

But interest on assets was trimmed. That led to the rise in gross domestic income (GDI), an alternative measure of economic growth, being pared to a 1.8% rate from the 2.1% pace estimated last month.

GDI advanced at a 6.3% rate in the fourth quarter.

The economy appears to have rebounded from the first-quarter slump, with consumer spending accelerating in April.

Business spending on equipment remained solid through May, while the goods trade deficit narrowed significantly as exports hit a record high. But the bounce is losing momentum because of the Fed’s aggressive posture.

The US central bank last month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994.

The Fed has increased its benchmark overnight interest rate by 150 basis points since March.

“It is extremely unlikely the economy is in recession now, however, despite the decline in first-quarter GDP and apparent weakness in output growth in the current quarter,” said Scott Hoyt, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

“Job growth remains strong, investment is growing, both households and business have strong balance sheets.”