U.S. economic activity unexpectedly contracted for the first time since the second quarter of 2020 in the first three months of 2022, with lingering supply chain constraints, inflation, and disruptions amid Russia’s war in Ukraine weighing on growth.
The Bureau of Economic Analysis (BEA) released its initial estimate of first-quarter U.S. gross domestic product (GDP) Thursday at 8:30 a.m. ET. Here were the main metrics from the report, compared to consensus data compiled by Bloomberg:
- GDP annualized, quarter-over-quarter: -1.4% vs. 1.0% expected, 6.9% in Q4
- Personal Consumption: 2.7% vs. 3.5% expected, 2.5% in Q4
- Core Personal Consumption Expenditures, quarter-over-quarter: 5.2% vs. 5.5% expected, 5.0% in Q4
The GDP report serves, as usual, as a backwards-looking overview of economic activity, capturing the January-through-March period. However, the metric is still an important indicator of the state of the U.S. economy at the start of this year — especially as some pundits now brace for the possibility of a recession in the near to medium term. A recession is typically considered two consecutive quarters of negative GDP growth.
“It is unfortunate that this GDP rate did not meet expectations, but unsurprising as the U.S. economy remains very volatile with geopolitical turbulence from the war in Ukraine, a global supply chain crisis, increasing inflation and the ongoing COVID-19 pandemic,” Steve Rick, chief economist at CUNA Mutual Group, said in an email. “All of these factors have shrunk GDP growth rates around the globe.”
And indeed, some of the points used to bolster the case for a formal downturn weighed on the pace of growth in the first quarter. Inflation has run at its hottest rate since the early 1980s, pressuring consumers’ propensity to spend. Plus, the Russia-Ukraine war has hit global supply chains that had yet to recover from the pandemic. More recently, a widespread COVID-19 outbreak that ramped up in China last month has also threatened to further hit supply chains and growth. And a surge in Omicron cases in the U.S. at the start of this year also impacted first-quarter GDP.
“In the first quarter, an increase in COVID-19 cases related to the Omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country,” the BEA said in its report Thursday morning. “Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased as provisions of several federal programs expired or tapered off.”
One of the main factors that weighed on GDP in the first quarter came from trade, or “net exports.” This subtracted 3.2 percentage points from headline GDP. And this came as the U.S. goods trade deficit raced to a record high in March at more than $125 billion. Imports, which subtract from headline GDP, reached an all-time high and far outpaced exports. Net exports have dragged on GDP for the past seven consecutive quarters.
Inventories also subtracted from GDP for the first time in three quarters, as supply chain challenges lingered and businesses struggled to replenish stocks. Private inventories brought down headline GDP by 0.84 percentage points for the first three months of the year.
And meanwhile, other categories that were expected to help boost GDP growth ultimately came in less robustly than expected. Consumer spending, which comprises about two-thirds of domestic activity, still provided a positive contribution to first-quarter GDP, but at a much slower rate than expected. Personal consumption rose 2.7% in the first quarter compared to the 3.5% increase anticipated.
Business investment also helped counterbalance some of the drags on first-quarter GDP, as the reopening and solid consumer demand prompted companies to invest for future growth. Private-sector fixed investment contributed nearly 1.3 percentage points to headline GDP, led by non-residential fixed investments from businesses.
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