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U.S. Economy Contracts 1.4% in First Quarter

April 28, 2022

Gross domestic product unexpectedly declined at a 1.4% annualized pace in the first quarter, marking the first economic contraction since the beginning of the pandemic.

The decline marked a sharp reversal from a 6.9% annual growth rate in the fourth quarter of 2021 and is well below even the subdued Dow Jones estimate of a 1% gain for the quarter.

A myriad of factors weighed on economic momentum during the quarter. Surging covid infections at the start of the year hampered economic activity, while inflation surged at the fastest pace in 40 years and Russia’s invasion of Ukraine raised costs for consumers and producers.

Much of the drop is attributable to the widening trade gap. Imports surged during the first quarter while exports fell. Businesses also restocked inventories at a much slower pace during the quarter than they had at the end of last year, which also pushed growth down. Government spending also slowed at the local, state, and federal levels. An 8.5% pullback in defense spending was a particular drag, eliminating one-third of a percentage point off the final GDP reading.

Consumer spending, which accounts for roughly three-quarters of all economic activity, rose at a 2.7% annual rate in the first quarter, an acceleration from the end of last year. Businesses also poured more money into equipment and research and development, triggering a 9.2% rise in business spending.

The GDP figures are unlikely to shift the Federal Reserve’s plans to aggressively raise interest rates this year. In fact, the report is likely to add to concerns that the economy is growing too fast. Private demand in the first quarter grew at a 3.7% annual rate, well above the 1.8% growth rate the Fed expects for the overall economy over the long run.

 

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