November 28, 2022

The U.S. economy contracted in the first three months of the year as falling exports and a decrease in government spending took a toll.

The gross domestic product shrank at annualized rate of 1.4%, the Commerce Department reported Thursday. It’s the first contraction since the coronavirus-driven recession of the second quarter of 2020.

GDP — the sum of all goods and services produced in the country — was dragged down by a sharp drop in exports, slower restocking of goods in stores and warehouses and decreased spending by federal, state and local governments, the Commerce Department said. An increase in imports, which are a subtraction in the calculation of GDP, also pulled down the growth number.

The contraction was a surprise for many economists, who had predicted weak economic growth in the first quarter.

“A few temporary factors — trade, inventories, and government — caused the economy to shrink in the first quarter. There was a huge increase in the trade deficit in the quarter as imports soared thanks to strong demand from U.S.  consumers and businesses, while exports fell as the global economy continues to struggle in its recovery from the pandemic-caused recession,” Gus Faucher, chief economist at PNC, said in a note.

On the other hand, consumers and businesses spent heavily, with personal consumption expenditures, nonresidential fixed investment and residential fixed investment all increasing.

“Although GDP fell in the first quarter, the U.S. economy is not in recession. Underlying demand remains strong, and the labor market is in excellent shape,” Faucher said.

Other indicators show that the economic expansion remains solid.

The U.S. job market — the most important pillar of the economy — is robust. This year, employers have added 560,000 new jobs a month, on average, while layoffs are near a 50-year low, hovering below 200,000 a week, as employers try to hold on to their workers.

Workers have received solid wage increases, with hourly pay rising 5.6% over the last 12 months, the fastest rate in years. Still, galloping inflation of 8.5% has wiped out pay growth for many workers.

Interest hikes coming

The Federal Reserve is moving quickly to raise interest rates to cool down inflation. Federal Reserve Chairman Jerome Powell has signaled the nation’s central bank is prepared to hike its key interest rate twice as fast as typical, when its rate-setting body meets in May.

Economists expect the rate hikes to proceed despite the unexpected slowdown in growth.

“The unexpectedly severe 1.4% annualised decline in first-quarter GDP growth probably won’t stop the Fed from hiking interest rates by 50 [basis points] next week, since officials will chalk it up to the temporary impact of Omicron and point to the strength of underlying demand — with the growth rate of sales to private domestic purchasers accelerating to a very healthy 3.7%,” Paul Ashworth, chief U.S. economist at Capital Economics, said in a research note.

In the second half of the year, the economy faces pressures that have heightened worries about its fundamental health and raised concerns about a possible recession. 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-19 lockdowns.

With reporting by the Associated Press.

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