US economy contracts in first quarter, raising fears of a recession

The US economy unexpectedly shrank last quarter, the first contraction since 2020, as a ballooning trade deficit and softer inventory growth belied an otherwise solid consumer and business demand picture.

Gross domestic product fell at a 1.4% annualized rate after a 6.9% pace of growth at the end of 2021, the Commerce Department’s preliminary estimate showed Thursday. The median forecast in a Bloomberg survey of economists was for a 1% increase.

Together, net exports and inventories subtracted about 4 percentage points from headline growth. Government spending shrank, also weighing on GDP. Still, real final sales to domestic purchasers, a measure of underlying demand that strips out the trade and inventories components of GDP, increased an annualized 2.6%, an improvement from the 1.7% pace in the fourth quarter.

On its face, the headline GDP figure was decidedly soft. But underlying details show still-solid household demand and business investment, corroborating comments about the economy from company executives during the current string of earnings calls.

Against a backdrop of quicker inflation, the figures will likely keep Federal Reserve monetary policy geared for a half-point hike in interest rates next week. Nonetheless, Fed officials need to balance that policy tightening with risks associated with building price pressures.

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 spending stagnated, reflecting changing consumer behavior.

At the start of this year, spending surged as Covid-19 cases declined. As the quarter dragged on, high inflation began to take a bite out of purchasing power. Nonetheless, many corporate executives on recent earnings calls touted the durability of the American consumer.