Gross domestic product fell unexpectedly by 1.4% year-on-year in the first quarter, marking a sharp turnaround for an economy that came after its best performance since 1984, the Ministry of Trade reported on Thursday.
The negative growth rate even missed the subdued Dow Jones estimate of a 1% gain for the quarter. GDP measures the production of goods and services in the United States over a three-month period.
A host of factors conspired to weigh against growth during the first three months of 2022, which fell off a cliff after a 6.9% increase that closed last year.
“In hindsight, this could be seen as a key report,” said Simona Mocuta, chief economist at State Street Global Advisors. “It reminds us that growth has been great, but things are changing and they will not be that great in the future.”
Despite the disappointing number, markets paid little attention to the report, with stock futures pointing to a higher opening on Wall Street. Some of the decline came from some factors likely to reverse later in the year, raising hopes that the United States can avoid a recession.
Rising Covid omicron infections to start the year hampered activity across the board, while inflation rose to a level not seen since the early 1980s and the Russian invasion of Ukraine also contributed to the economic stasis.
Prices rose sharply during the quarter, with the GDP price index deflator rising 8% after a jump of 7.1% in the 4th quarter.
The decline in growth was due to a slowdown in private inventory investment, which helped accelerate growth in the latter half of 2021. Other constraints came from exports and public spending across state, federal and local governments, as well as rising imports.
A 8.5% decline in defense spending was a particular driving force, beating a third of a percentage point from the final GDP measurement.
Consumer consumption remained fairly good during the quarter, rising 2.7% as inflation kept up with prices. However, a growing trade deficit helped shave 3.2 percentage points of growth as imports offset exports.
“This is noise; not signal. The economy is not falling into recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Net trade has been hammered by an increase in imports, especially of consumer goods, as wholesalers and retailers have tried to rebuild stocks. This can not last much longer and imports will eventually fall directly and net trade will boost GDP growth in Q2 and / or Q3. “
While expectations of the recession on Wall Street remain low, there are further problems ahead for the economy: In an effort to combat budding price increases, the Federal Reserve plans to introduce a series of rate hikes aimed at slowing growth further. The price index for personal consumption expenditure excluding food and energy, a preferred inflation target for the Fed, rose 5.2% in the quarter, well above the central bank’s inflation target of 2%.
Current market pricing indicates the equivalent of 10 quarter percentage point interest rate movements that would bring the Fed’s benchmark rate to around 2.75% by the end of the year. It comes after two years of near-zero interest rates aimed at allowing a recovery from the steepest recession in American history.
At the same time, the Fed has stopped its monthly bond buying program, which aims to keep interest rates low and money flow through the economy. The Fed will begin to shrink its current bond holdings as soon as next month, slowly at the beginning and then eventually at a pace expected to hit as high as $ 95 billion a month.
While economists still largely expect the United States to get around a direct recession, the risks are rising.
Goldman Sachs sees about 35% chance of negative growth in a year. In a forecast that is an outlier on Wall Street, Deutsche Bank sees the chance that a “significant recession” will hit the economy in late 2023 and early 2024, the result of a Fed that will have to tighten much more to curb inflation than forecasters currently anticipate.
It all comes after a year in which GDP rose by 5.7%, the fastest since 1984. While consumer spending, which accounts for nearly 70% of the US economy, drove growth in the first half of 2021, stockpiling from depleted pandemic levels became accounted for almost all of the growth in the last two quarters of the year.
Sustaining this growth into 2022 will require a easing of clogged supply chains and some solution in Ukraine, both of which will face pressure from higher interest rates from not only the Fed but also global central banks engaged in a similar fight against inflation .
Correction: The decline in growth was due to a slowdown in investment in private inventories, which helped accelerate growth in the latter half of 2021. An earlier version failed the year.