- GDP in the first quarter fell by 1.4%
- Inventories and trade mask underlying economic strength
- Increase in business investment; strong consumer spending
- Weekly jobless claims fall by 5,000 to 180,000
WASHINGTON, April 28 (Reuters) – The U.S. economy contracted unexpectedly in the first quarter amid a resurgence in COVID-19 cases and a drop in government pandemic relief funds, but the decline of production is misleading as domestic demand has remained strong.
The first drop in gross domestic product since the short, sharp pandemic recession nearly two years ago, reported by the Commerce Department on Thursday, was mainly due to a wider trade deficit as imports rose and a slowdown in the rate of inventory accumulation.
A measure of domestic demand accelerated from the fourth quarter rate, dispelling fears of stagflation or recession. The Federal Reserve is expected to raise interest rates by 50 basis points next Wednesday. The US central bank raised its key rate by 25 basis points in March and is expected to start reducing its holdings soon.
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“The economy is still showing some resilience, but the first quarter GDP report signals the start of more moderate growth this year and next, largely in response to higher interest rates,” he said. said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. . “Despite the contraction, the Fed has no choice but to increase aggressively in May to contain inflation.”
Gross domestic product fell at an annualized rate of 1.4% last quarter, the government said in its preliminary GDP estimate. The economy grew at a healthy pace of 6.9% in the fourth quarter. Economists polled by Reuters had forecast GDP growth up 1.1%. Estimates ranged from a rate of contraction as low as 1.4% to a rate of growth as high as 2.6%.
The economy has also been impacted by supply chain challenges, labor shortages and runaway inflation. The last quarter decline is a false leader, as GDP remains 2.8% higher than its level in the fourth quarter of 2019 and the economy grew by 3.6% on an annual basis. In addition, 1.7 million jobs were created in the first quarter and manufacturing production increased at a rate of 5%.
“It’s nonsense that real GDP has fallen,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.
But the lag points to weaker productivity in the final quarter.
Frontloading by companies fearing shortages due to the Russian-Ukrainian war contributed to an increase in imports. Exports fell, leading to a sharp widening of the trade deficit, which reduced GDP growth by 3.20 percentage points, the most since the third quarter of 2020. Trade has now held back growth for seven consecutive quarters.
Businesses have turned to imports to meet demand as local manufacturers lack the capacity to scale up production. Business inventories rose at a pace of $158.7 billion, slowing from the robust rate of $193.2 billion in the October-December quarter. Investment in inventories reduced GDP growth by 0.84 percentage points.
Wall Street stocks were higher as investors shrugged off falling GDP. The dollar appreciated against a basket of currencies. US Treasury prices fell.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose at a rate of 2.7% from the 2.5% pace in the fourth quarter, despite the hit of the winter surge of coronavirus cases, driven by the Omicron a variant.
The loss of pandemic money to households by the government has been partially offset by rising wages amid a tightening labor market. Public spending fell for a second consecutive quarter.
Strengthening labor market conditions were bolstered by a separate Labor Department report on Thursday showing initial claims for state unemployment benefits fell 5,000 to 180,000 seasonally adjusted for the week ended April 23. . With a record near 11.3 million job openings at the end of February, employers are desperately clinging to their workers.
Even with soaring food and gas prices, there is still no sign of consumers pulling back. The government’s measure of inflation in the economy jumped to a rate of 7.8%, the fastest rate in 41 years, after rising to a pace of 7.0% in the fourth quarter. Inflation on all measures exceeded the Fed’s 2% target.
At least $2 trillion in excess savings accumulated during the pandemic provides a cushion against inflation.
Labor shortages have seen businesses boost investment, with spending on equipment rising at a rate of 15.3% last quarter. They mainly bought computers and industrial machinery.
This, combined with strong consumer spending, pushed up final sales to private domestic buyers at a rate of 3.7%. This measure of domestic demand, which excludes trade, inventories and government spending, rose at a rate of 2.6% in the fourth quarter. Final sales to domestic private buyers account for approximately 85% of total expenditure.
The housing market posted another second consecutive quarterly gain, but with the 30-year fixed mortgage above 5%, the outlook is uncertain.
Although concerns remain that the Fed could tighten monetary policy aggressively and tip the economy into recession, most economists remain unconvinced, pointing to strong domestic demand and signs that inflation may have reached a peak.
Consumer spending in the last quarter was driven by services. Shifts in demand for goods should help ease pressure on supply chains, although coronavirus-related lockdowns in China pose a risk.
“The US economy is not close to recession,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “Underlying demand remains strong and the labor market is in excellent shape. Growth will resume in the second quarter.”
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Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci
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