Lodi News-Sentinel

U.S. economy posts surprise contractio­n

- Olivia Rockeman

The U.S. economy shrank for the first time since 2020, reflecting an import surge tied to solid consumer demand.

While the surprise contractio­n adds to political headaches for President Joe Biden, it’s unlikely to dissuade the Federal Reserve from hiking interest rates aggressive­ly to combat inflation. Gross domestic product fell at a 1.4% annualized rate in the first quarter following a 6.9% pace at the end of last year, the Commerce Department’s preliminar­y estimate showed Thursday. The median projection in a Bloomberg survey of economists called for a 1% increase.

The report is more an illustrati­on of how GDP calculatio­ns tend to be volatile from quarter to quarter, not necessaril­y indicating weakness in the economy or a sign of recession. The contractio­n was due to a jump in imports and a drop in exports, coupled with a slower buildup of businesses’ stockpiles. On a year-overyear basis, the economy grew 3.6%.

Together, trade and inventorie­s subtracted about 4 percentage points from headline growth. Government spending shrank, also weighing on GDP. But real final sales to domestic purchasers, a measure of underlying demand that strips out the trade and inventorie­s components, accelerate­d to a 2.6% annualized rate.

Against a backdrop of quicker inflation and solid spending, Fed monetary policy is still geared for a halfpoint rate hike next week. Nonetheles­s, officials need to balance tighter policy with risks to demand.

The economy faces other potential headwinds that include knock-on effects from Russia’s war in Ukraine. Growth prospects in Europe are deteriorat­ing, some raw materials are in short supply and the Chinese government’s severe pandemic-related lockdown measures are leaving supply chains in disarray.

The S&P 500 rose and the yield on the 10-year Treasury note remained higher along with the dollar.

“With strong growth of consumer spending, business investment and employment in the first quarter, the U.S. economy was not in a recession at the beginning of the year,” said Bill Adams, chief economist at Comerica Bank. “Growth should resume in the second quarter as the trade deficit and inventorie­s become smaller headwinds.”

Biden blamed the contractio­n on “technical factors,” saying in a statement that employment, consumer spending and investment all remain strong.

The Commerce Department’s data showed personal consumptio­n, the biggest part of the economy, rose an annualized 2.7% in the first quarter, compared with 2.5% at the end of 2021. Services spending added 1.86 percentage points to GDP, while goods purchases stagnated, reflecting changing consumer behavior.

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