WASHINGTON: The US economy shrank at a 1.6% annual pace in the first three months of the year even as consumers and businesses continued to spend at a decent pace, the government on Wednesday reported a slight decline from its previous estimate for the January-March quarter. .
It was the first decline in GDP, the biggest measure of economic output since the second quarter of 2020, in the depths of the COVID-19 slowdown, and after a strong 6.9% expansion in the last three months of 2021. Inflation is running at a 40-year high, and consumer confidence is sinking.
Still, negative numbers probably don’t signal the start of a recession, and economists expect growth to resume later this year.
The decline in the first quarter was mainly due to two factors that do not say much about the underlying health of the economy:
A large trade deficit reflecting Americans’ appetite for foreign goods and services narrowed 3.2 percentage points from the January-March GDP change.
And a slower resumption of goods in stores and warehouses, which built up inventory in the previous quarter for the 2021 holiday shopping season, fell 0.4 percentage points from first-quarter economic growth.
Consumer spending, which accounts for about two-thirds of economic output, grew at an annual rate of 1.8% from January to March. And business investment grew 5%.
Still, the US economy, which has enjoyed a swift recovery from a short but disastrous 2020 coronavirus The recession is under pressure as the Federal Reserve raised interest rates to rein in inflation, which is hitting 40-year highs.
The rebound took businesses by surprise, and an unexpected surge in customer orders overwhelmed factories, ports and freight transport, leading to shortages, delays and high prices. In May, consumer prices rose 8.6% from a year earlier, the biggest year-on-year jump since 1981.
In response, the Fed accelerated its plan to raise interest rates, raising its benchmark short-term rate by three-quarters of a percent, the biggest increase since 1994. The Fed hopes to achieve a so-called soft landing slowing economic growth enough to bring inflation below its 2% target without a recession.
High borrowing costs are already affecting the housing market.
For the full year, the economy is still expected to turn in respectable growth: 2.5%, according to World Bank.
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