The US economy shrank in the first quarter

By Anneken Tappe, CNN Business

America’s economy unexpectedly shrank in the first quarter of 2022, data from the Bureau of Economic Analysis showed Thursday.

The nation’s gross domestic product — the broadest measure of economic activity — declined at an annualized rate of 1.4% between January and March in an abrupt reversal of the prior year’s strong growth.

While one quarter does not yet make a trend, it is a warning sign for how the recovery is going: Two straight quarters of declining growth meet a commonly used definition of a recession.

It was a marked slowdown from the 6.9% growth pace recorded in the final quarter of last year, and the worst performance since the pandemic recession in the second quarter of 2020. Economists had predicted an annualized growth rate of 1.1%, according to Refinitiv.

Despite the lower numbers, President Joe Biden categorized the US economy as “resilient in the face of historic challenges,” in a statement released Thursday morning.

“While last quarter’s growth estimate was affected by technical factors, the United States confronts the challenges of Covid-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength,” the statement said.

What drove the decline?

Much of the first quarter decline in the United States was due to a decrease in inventory investment, which had been booming in the final months of 2021.

That means the GDP decline should be taken with a grain of salt, warned Ryan Sweet, senior director of economic research at Moody’s Analytics, on Wednesday before the data was published.

Exports and government spending also fell, while imports rose. Consumer spending, which is vital to the economy, increased as prices kept rising. Americans spent more on services, led by health care. That offset a small decline in goods spending, which shrank due to lower spending on gas.

Gas prices shot through the roof in response to Russia’s war in Ukraine, which jolted energy markets around the world.

The price index tracking personal consumption expenditure rose 7% in the first three months of the year, or 5.2% when stripping out energy and food prices.

“It is unfortunate that this GDP rate did not meet expectations, but unsurprising as the US economy remains very volatile with geopolitical turbulence from the war in Ukraine, a global supply chain crisis, increasing inflation and the ongoing Covid-19 pandemic,” said Steve Rick, chief economist at CUNA Mutual Group, in emailed comments. “All of these factors have shrunk GDP growth rates around the globe.”

A second estimate of first quarter GDP growth will be published at the end of May.

What this means for the Fed

The unexpected GDP decline likely didn’t change the immediate outlook for the Federal Reserve’s monetary policy.

The central bank, which is starting to reverse course after a period of ultra-loose policies during the pandemic, is expected to raise interest rates next week. It would be the second rate hike of the year. The vast majority of market participants expect a half-percentage-point increase, up from the quarter-point hike announced in March. Earlier this month, Fed Chairman Jerome Powell said a bigger rate hike was on the table for the May meeting.

“The Fed will continue to press on the policy brakes with increased determination over the coming months as inflation shows pesky persistence,” said Greg Daco, chief economist at EY-Parthenon.

While economists still hope that March may have marked the pandemic inflation peak, only the April economic data, which is still some weeks out, can confirm that.

On Friday, the Commerce Department will report the Personal Consumption Expenditures, or PCE, price index for March.

Correction: An earlier version of this story incorrectly stated that the economy expanded in the first quarter of the year.

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