GDP drops 1.4%, US economy shrinks for first time since 2020

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The US economy shrank by 1.4% in the most recent quarter, contracting for the first time since the pandemic-induced recession two years ago, according to government data released on Thursday.

Surging inflation amid persistent labor shortages continues to pummel the nation’s economy, experts say, with the latest numbers hit by supply-chain disruptions, fading government stimulus and a widening trade deficit as the US imported far more goods than it sold.

The latest figures are stoking concerns that the US may be on the verge of a recession, although spending by businesses and consumers, the main driver of the US economy, rose 3.7% adjusting for inflation. Meanwhile, unemployment is at 3.6%, close to the pre-pandemic record lows.

“Today’s shock drop in GDP is a wake-up call that the economy isn’t as strong as we all thought,” said Chris Zaccarelli, chief investment officer for Charlotte-based Independent Advisor Alliance.

“It’s possible that GDP gets revised higher next month, as this is just the first release and there will be two revisions, but it is a warning sign.”

Despite the shrinking GDP, consumer spending continued apace, according to federal data.
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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. The economy grew 5.7% last year — the highest calendar-year growth since 1984.

Seasonally adjusted new jobless claims declined from the previous week to 180,000 — which is slightly above the more than 50-year low of 166,000 last month. Layoffs have reached historically low levels as employers, plagued by labor shortages, have held tightly onto their workers.

Wages are rising steadily as companies compete to attract and retain workers, a trend that has helped maintain consumers’ ability to spend.

The latest figures are stoking fears that the US economy is on the verge of a recession.
The latest figures are stoking fears that the US economy is on the verge of a recession.
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But inflation is squeezing households as gas and food prices spike, borrowing costs mount and the global economy is rattled by Russia’s invasion of Ukraine and China’s COVID lockdowns.

The surge in consumer spending has helped fuel inflation, which reached 8.5% in March compared with 12 months earlier.

Fed Chair Jerome Powell has signaled a rapid series of rate increases to combat higher prices. The Fed is set to raise its key short-term rate by a half-percentage point next week, the first hike that large since 2000.

At least two more half-point increases — twice the more typical quarter-point hike — are expected at subsequent Fed meetings. They would amount to one of the fastest series of Fed rate hikes in decades.

Some analysts are optimistic that the US can avoid a recession, citing strong job numbers.
Some analysts are optimistic that the US can avoid a recession, citing strong job numbers.
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“The Fed’s job has become even harder,” said Victor Calanog, the head of CRE Economics at Moody’s Analytics, noting that the numbers don’t bode well for the commercial real estate industry. “Do they raise rates to slow inflation? At the very real risk of pushing economic growth to even deeper negative territory?”

Other analysts are nonetheless optimistic despite the underwhelming GDP numbers.

“Huge miss on GDP this morning, but just looking at headline is misleading,” said Cliff Hodge, chief investment officer for Charlotte-based Cornerstone Wealth. “The shift to services spending bodes well for inflation moving forward, and core PCE (personal consumption expenditures) came in a bit light.”

Mark Hamrick, a senior economic analyst for Bankrate, agreed that the dip is less worrisome as “key drivers including consumer and business spending have been holding up.”

Hamrick added: “Among the key questions for the balance of this year is whether inflation begins to weigh on the job market and the broader economy because consumers are pressured to cut back.”

With Post Wires

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