The US economy unexpectedly shrank last quarter for the first time since 2020 as the trade deficit soared, adding to political headaches for President Joe Biden, but unlikely to sway the Fed from raising interest rates aggressively to combat inflation.
Gross domestic product fell at an annualized rate of 1.4 percent as rising imports and weaker inventory growth more than offset strong demand from consumers and businesses, the Department of Finance’s preliminary estimate showed on Thursday. Trade.
Printing fell short of all but one estimate in a survey of Bloomberg. The median projection was for a 1 percent increase.
Together, net exports and inventories subtracted regarding 4 percentage points from overall growth. Public spending contracted, which also affected GDP.
Still, actual final sales to domestic buyers, a measure of underlying demand that excludes trade and inventory components, rose 2.6 percent annualized, an improvement from the 1.7 percent pace in the fourth quarter.
At first glance, the headline GDP figure was decidedly weak. But underlying details show still-robust household demand and business investment, corroborating comments regarding the economy from company executives during the current round of earnings calls.
Against a backdrop of faster inflation, the figures are likely to keep the Federal Reserve’s monetary policy poised for a half-point hike in interest rates next week. Still, Fed officials must balance such policy tightening once morest the risks associated with mounting price pressures.
Ten-year Treasury yields reversed an earlier decline, while stock futures and the dollar maintained their gains.
“The economy is not slipping into recession,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note. “Net trade has been hit by a surge in imports, especially of consumer goods, as wholesalers and retailers have tried to rebuild inventory.”
“This can’t go on much longer, and imports will in due course drop completely,” said Shepherdson, who projected a 2 percent decline in GDP.
Data from the Commerce Department showed that personal consumption, the largest part of the economy, rose an annualized 2.7 percent in the first quarter, compared with 2.5 percent at the end of 2021.
Spending on services added 1.86 percentage points to GDP, while spending on goods stagnated, reflecting changing consumer behavior.
Earlier this year, spending increased as COVID cases declined. As the quarter progressed, high inflation began to erode purchasing power. Nonetheless, many corporate executives on recent earnings calls touted the durability of the American consumer.
Looking ahead, rapid inflation and declining fiscal support point to more moderate outlay growth for the rest of the year. Additionally, higher interest rates may, at some point, prompt companies to cut capital spending budgets.
Other potential obstacles to the US economy include collateral effects of Russia’s war in Ukraineincluding deteriorating growth prospects in Europe, raw material shortages and persistent supply chain setbacks.
Trade flows are also at risk from the Chinese government’s severe pandemic-related lockdown measures that have hampered activity at some of the nation’s ports.
“We remain confident that the fundamental strength of consumer demand trends will remain intact for several years.” — James Peters, CFO of Whirlpool Corp., April 26 earnings call
“If anything, discretionary spending, especially by wealthy consumers and credit card holders, has risen in a fairly healthy way. So overall, there is no obvious impact on inflation.” — Visa Inc. CFO Vasant Prabhu, April 26 earnings call
“North American dealer inventory remains at record lows with healthy demand further constrained by persistent global supply chain headwinds, limiting any improvement in inventory levels,” — Michael Speetzen , CEO of Polaris Inc., April 26 earnings call
“While the current environment remains difficult to predict, I expect that as 2022 progresses, we will begin to experience a decrease in supply chain disruptions, general inventory rebuilding in many end-use markets, and a healthy consumer willing to spend, especially in North America. .” — Michael McGarry, CEO of PPG Industries Inc., April 22 earnings call
Last quarter, inflation-adjusted business investment rose 9.2 percent annualized, the strongest in a year and reflecting higher spending on equipment and intellectual property, according to the GDP report.
Residential investment rose at a 2.1 percent pace as builders began to move forward on backlogged projects. While underlying housing demand remains strong, a rapid rise in mortgage rates and record home prices are weighing on affordability and might start to weigh on homebuilding later this year.
The report showed that trade subtracted 3.2 percentage points from GDP in the first quarter, reflecting a rise in imports and a fall in exports. The US economy has recovered more quickly from a pandemic than many countries abroad, boosting demand for foreign-made products.
The change in inventories subtracted 0.84 percentage point from the general figure during the January-March period. In the fourth quarter, they added a whopping 5.3 points. Looking ahead, businesses will continue to replenish their inventories in an effort to replenish following strong merchandise demand seen in 2021.
The personal consumption expenditures price index excluding food and energy, a measure of inflation closely watched by Fed officials, grew an annualized 5.2 percent last quarter. Monthly PCE data for April will be released on Friday.
A separate report on Thursday showed state unemployment insurance claims fell slightly last week, consistent with an extremely tight job market.
