Q1: Economy shrank, spending stayed up
WASHINGTON – The U.S. economy shrank last quarter for the first time since the pandemic recession struck two years ago, contracting at a 1.4% annual rate, but consumers and businesses kept spending in a sign of economic durability.
The economy’s overall decline in the January-March quarter does not mean a recession is likely in the coming months. Most economists expect a rebound this quarter as solid hiring and wage gains sustain growth.
Instead, the steady spending by households and companies suggests the economy will likely keep expanding this year even though the Federal Reserve plans to raise rates aggressively to fight the inflation surge. The first quarter was hampered mainly by a slower restocking of goods in stores and warehouses and by a sharp drop in exports.
“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 Commerce Department’s estimate Thursday of the first quarter’s gross domestic product – the nation’s
total output of goods and services – fell far below the 6.9% annual growth in the fourth quarter of 2021. And for 2021 as a whole, the economy grew 5.7%, the highest calendar-year expansion since 1984.
The first quarter’s weak showing is evidence the economy is slowing from last year’s robust rebound from COVID, which was fueled in part by vast government aid and ultra-low interest rates. With stimulus checks and other government supports having ended, consumer spending has slowed from its blistering pace in the first half of last year.
The economy is in an unusual position. Unemployment is near a 50-year low, and wages are rising at a healthy pace. Yet serious threats have emerged from widespread disruptions overseas and rampant inflation, which is eroding consumers’ spending power. Last month, prices jumped 8.5% from a year earlier, the fastest such rise in four decades.
Last quarter’s negative GDP number also undercuts a key political message of President Joe Biden. The president has pointed to rapid growth and strong hiring as a healthy counterpoint to soaring inflation, which is highly unpopular with voters.
Compounding Biden’s political message, Russia’s invasion of Ukraine and rising COVID cases overseas are weighing on the economy and heightening inflation pressures. Many companies are also still struggling to obtain the parts and supplies they need from tangled supply chains.
A broader global slowdown is also expected this year, according to estimates last week by the International Monetary Fund. The 190-nation lending organization now foresees the disruptions of the Ukraine war and COVID slowing global growth to 3.6% this year from 6.1% last year.
Still, the U.S. job market – the most important pillar of the economy – remains robust. The number of people receiving unemployment benefits fell to the lowest level since 1970.