WASHINGTON — The U.S. economy shrank at a 1.6% annual pace in the first three months of the year, the government reported Wednesday in a slight downgrade from its previous estimate for January-March quarter.
It was the first drop in gross domestic product — the broadest measure of economic output — since the second quarter of 2020, in the depths of the COVID-19 recession, and followed a strong 6.9% expansion in the final three months of 2021. The inflation rate is now at 40 year highs and the consumer confidence is declining.
The Commerce Department estimated that 1.5% GDP growth would be achieved in the first quarter of last month. But on its third and final estimate Wednesday the department said consumer spending — which accounts for about two-thirds of economic output — was substantially weaker than it had calculated earlier, growing at a 1.8% annual pace instead of the 3.1% it estimated in May.
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This was partially offset by changes to Commerce’s calculation of inventories. Commerce reported that the reduction in restocking at company shelves was less than 0.4% of first-quarter growth. That’s down from the 1.1% it had estimated in May.
Still, the negative GDP number probably doesn’t signal the start of a recession, and economists expect growth to resume later this year.
The first-quarter dip doesn’t say much about the underlying health of the economy: A bigger trade deficit — reflecting Americans’ appetite for foreign goods and services — slashed 3.2 percentage points off the change in January-March GDP.
The growth in business investment was healthy at 5%
Still, the U.S. economy, which has enjoyed a brisk recovery from 2020′s short but devastating coronavirus recession, is under pressure as the Federal Reserve raises interest rates to rein in inflation that’s running at a 40-year high.
Businesses were taken by surprise when the rebound occurred. Unexpected surges in orders overtook factories, ports, freight yards and cargo yards. This led to delays, shortages and increased prices. The biggest increase in consumer prices since 1981 was 8.6%, which is 8.6% higher than a previous year.
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The Fed responded by speeding up their plan to increase interest rates. It raised its benchmark short term rate by 34 of a percent, which is the largest rise since 1994. The Fed hopes to achieve a so-called soft landing — slowing economic growth just enough to bring inflation down it its 2% target without causing a recession.
The housing market is already suffering from higher borrowing costs.
The World Bank predicts that the economy will still grow by 2.5% for the whole year.
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