The U.S. economy unexpectedly shrank last quarter for the first time since 2020 as the trade deficit ballooned, adding to political headaches for President Joe Biden but unlikely to sway the Federal Reserve from hiking interest rates aggressively to combat inflation.
Gross domestic product fell at a 1.4% annualized rate as surging imports and softer inventory growth more than offset otherwise solid consumer and business demand, the Commerce Department’s preliminary estimate showed Thursday. The print was below all but one estimate in a Bloomberg survey. The median projection 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, 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.
Ten-year Treasury yields reversed an earlier decline, while stock futures and the dollar held onto gains.
“The economy is not falling into recession,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note. “Net trade has been hammered by a surge in imports, especially of consumer goods, as wholesalers and retailers have sought to rebuild inventory.”
“This cannot persist much longer, and imports in due course will drop outright,” said Shepherdson, who projected a 2% decline in GDP.
Consumer Spending
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.