US economy shrank by 1.5% in the first three months of 2022

July 12, 2022

The United States economy shrank in the first three months of the year even though consumers and businesses kept spending at a solid pace, the government reported on Thursday, in a slight downgrade of its previous estimate for the January-March quarter.

Last quarter’s drop in the US gross domestic product — the broadest gauge of economic output — does not likely signal the start of a recession. The contraction was caused, in part, by a wider trade gap: The nation spent more on imports than other countries did on US exports. The trade gap slashed first-quarter GDP by 3.2 percentage points.

Economy has likely resumed growing in the current April-June quarter.

The Department of Commerce estimated that the economy contracted at a 1.5 percent annual pace from January through March. This is a slight downward revision from its first estimate of 1.4 percent, which it issued last month. It was the first drop in GDP since the second quarter of 2020; in the depths of the COVID-19 recession, and followed a robust 6.9 percent expansion in the final three months of 2021.

The nation has remained stuck in the painful grip of high inflation, which has caused particularly severe hardships for lower-income households, many of them people of colour. Though many US workers have been receiving sizable pay raises, their wages in most cases have not kept pace with inflation. In April, consumer prices jumped 8.3 percent from a year earlier, just below the fastest such rise in four decades, set one month earlier.

High inflation has also posed a political threat to President Joe Biden and Democrats in Congress as midterm elections draw near.

Still, by most measures, the economy as a whole remains healthy, though likely weakening. Consumer spending — the heart of the economy — is still solid: It grew at a 3.1 percent annual pace from January through March. Business investment in equipment, software and other items that are intended to improve productivity rose at a healthy 6.8 percent annual rate last quarter.

And a strong job market has given people the money and confidence to spend. Employers have added more than 400,000 jobs for 12 straight months, and the unemployment rate is near a half-century low. Businesses have advertised so many jobs that there are now roughly two openings, on average, for every unemployed American.

Global context

Considerable uncertainties, though, have clouded the outlook for the US and global economies. Russia’s war against Ukraine has disrupted trade in energy, grains and other commodities and driven fuel and food prices dramatically higher. China’s draconian COVID-19 crackdown has also slowed growth in the world’s second-biggest economy and worsened global supply chain bottlenecks. The Federal Reserve has begun aggressively raising interest rates to fight the fastest inflation the United States has suffered since the early 1980s.

The Fed is banking on its ability to engineer a so-called “soft landing”: Raising borrowing rates enough to slow growth and cool inflation. Many economists, though, are sceptical that the central bank can pull it off. More than half the economists surveyed by the National Association for Business Economics foresee at least a 25 percent probability that the US economy will sink into recession within a year.

“While we still expect the Fed to steer the economy toward a soft landing, downside risks to the economy and the probability of a recession are increasing,” economists Lydia Boussour and Kathy Bostjancic of Oxford Economics cautioned Thursday in a research note.

“A more aggressive pace of Fed rate hikes, a tightening in financial conditions, the ongoing war in Ukraine and China’s zero-Covid strategy increase the risk of a hard landing in 2023,” they added.

In the meantime, higher borrowing rates appeared to be slowing at least one crucial sector of the economy — the housing market. Last month, sales of both existing homes and new homes showed signs of faltering, worsened by sharply higher home prices and a shrunken supply of properties for sale.

Source: US economy shrank by 1.5% in the first three months of 2022.