US economy report: GDP shrank by 1.4% in first quarter but consumers kept spending

WASHINGTON – The U.S. economy shrank last quarter for the first time since the pandemic hit two years ago, shrinking at an annual rate of 1.4%, but consumers and businesses continued to spend as a sign of underlying resilience.

Fixed spending suggests the economy could continue to grow this year, although the Federal Reserve plans to raise interest rates aggressively to combat the inflation boom. The growth of the first quarter was hindered mainly by the slower renewal of inventories of goods in stores and warehouses and by the sharp decline in exports.

The Ministry of Commerce on Thursday estimated the gross domestic product of the first quarter – the total production of goods and services of the country – fell well below the annual growth of 6.9% in the fourth quarter of 2021. And for 2021 overall, the economy grew 5.7%. the highest calendar year extension since 1984.

The economy is facing pressures that have heightened concerns about its fundamental health and raised concerns about a possible recession. Inflation is pushing households as gas and food prices rise, borrowing costs rise and the global economy is shaken by Russia’s invasion of Ukraine and China’s lockdown of COVID.

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However, the US labor market – the most important pillar of the economy – remains robust. And in the January-March quarter, businesses and consumers increased their spending at an annual rate of 3.7% after adjusting for inflation.

Economists believe that this trend is a better indicator of the total GDP of the underlying strength of the economy. Most analysts expect the steady pace of spending to keep the economy growing, although the outlook remains highly uncertain.

The slowdown in the last quarter followed strong growth in the last quarter of 2021, due to the increase in inventories as companies renewed inventories in anticipation of spending for the holiday season. Businesses continued to rebuild stocks last quarter, but did so more slowly, hampering growth in the process.
Imports also rose in the January-March quarter, as businesses and consumers bought more goods from overseas, while U.S. exports rose more slowly. This inequality widened the trade deficit and subtracted from quarterly growth.

The weakness of the overall growth rate of the economy is at odds with the vitality of the labor market. At 3.6%, the unemployment rate is almost back to the half-century low reached just before the pandemic. The redundancies have reached historically low levels as employers, plagued by labor shortages, have kept their employees tight.

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Wages are rising steadily as companies compete to attract and retain employees, a trend that has helped maintain consumers’ ability to spend. At the same time, however, these spending helped fuel inflation, which reached 8.5% in March compared to 12 months earlier.

Fed Chairman Jerome Powell has signaled a sharp rise in interest rates to combat higher prices. The Fed is set to raise its key short-term interest rate by half a percentage point next week, the first such large increase since 2000. At least two more half-point increases – twice the standard quarterly rate – are expected at next Fed meeting. They would be tantamount to one of the Fed’s fastest rising interest rates in decades.

Powell bets that with job openings at near-record levels, healthy consumer spending and unusually low unemployment, the Fed could slow the economy fast enough to tame inflation without causing a recession. However, most economists are skeptical that the Fed can achieve this target with inflation as high as it is.

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