GDP falls but economists expect a rally

WASHINGTON — The U.S. economy shrank in the first three months of the year and faces threats from high inflation and rising interest rates, yet economists foresee a return to growth for the rest of 2022, based on the strength of the job market and consumer spending.

The first quarterly decline in gross domestic product since the pandemic hit in 2020 — a 1.4% drop on an annualized basis — is probably not a prelude to recession, economists say. That may bring little comfort to President Biden and Democrats, who face midterm elections this year in which rising prices for food, energy and other essentials will be a major theme of Republican opposition.

Two factors were key drivers of the U.S. economy’s decline last quarter, according to Thursday’s report from the Commerce Department:

Imports soared nearly 20% as Americans spent heavily on foreign-made goods, while exports fell almost 6% as growth slowed overseas — a widening of the trade deficit that subtracted 3.2 percentage points from GDP.

Businesses had built inventories aggressively ahead of last year’s holiday shopping season, when they feared pandemic-related supply shortages, so they restocked more slowly at the start of 2022, denting GDP by 0.8 of a percentage point.

As a result, the nation’s total output of goods and services fell far below the 6.9% annual growth rate in the fourth quarter of 2021.

However, rising wages supported robust spending by households, and higher profits drove investment by companies. These factors suggest strong fundamentals for the U.S. economy, even in the face of challenges from the pandemic, the war in Ukraine and the Federal Reserve’s plans to raise interest rates to fight inflation.

“The report isn’t as worrisome as it looks,” said Lydia Boussour, lead U.S. economist at Oxford Economics. “The details point to an economy with solid underlying strength that demonstrated resilience in the face of Omicron, lingering supply constraints and high inflation.”

The U.S. economy is in an unusual position.

The job market — the most important pillar of the economy — remains robust, with the unemployment rate near a 50-year low of 3.6%, and wages rising steadily. And in the January-March quarter, businesses and consumers increased their spending at a 3.7% annual rate after adjusting for inflation.

Economists consider these trends a better gauge of the economy’s core strength than the latest GDP figure.