US Economy Shrinks In First Quarter

( In a completely unexpected revelation the U.S. economy shrunk during the first quarter of 2022, putting a wrench in hopes for a continued economic recovery.
During the first quarter, the country’s gross domestic product dropped at an annualized pace of 1.4%. On Thursday, the Department of Commerce released these statistics in what can only be seen as a massive reversal for the American economy, which had just experienced its best annual performance sine back in 1984.
Last year ended with a gain of 6.9%.
Before the actual data was released, the Dow Jones had the most somber of predictions for first quarter GDP growth — but even they predicted a gain of 1%. GDP essentially measures America’s total output of services and goods, with this measurement taking into account the first three months of 2022.
There were many factors working together that weighed down potential growth early this year.
As State Street Global Advisors’ chief economist, Simona Mocuta, explained to CNBC:
“In retrospect, this could be seen as a pivotal report. It reminds us of the reality that growth has been great, but things are changing and they won’t be that great going forward.”
COVID-19 infections due to the emergence of the Omicron variant hampered economic activity in just about every sector to start 2022. In addition, the economy was weighed down heavily by Russian’s invasion of neighboring Ukraine and a surge of inflation that hasn’t been experienced in nearly 40 years.
Prices of consumer goods increased substantially in the first quarter. The GDP price index deflator increased 8% for the quarter, after a jump of 7.1% in the fourth quarter of 2021.
Additional restraints on the U.S. economy during the first quarter included government spending at all levels, increasing imports and exports. Defense spending was down 8.5%, a particularly harsh drag on GDP.
The U.S. experienced a huge trade deficit, with imports far outweighing exports during the quarter.
Yet, despite all this, consumer spending did fairly well, increasing 2.7% for the quarter. That’s important, as that data point accounts for roughly two-thirds of the U.S. economy.
While the overall data wasn’t good, Pantheon Macroeconomics’ chief economist, Ian Shepherdson, didn’t think it was all that bad. He commented:
“This is noise; not signal. The economy is not falling into recession. Net trade has been hammered by a surge in imports, especially of consumer goods, as wholesalers and retailers have sought to rebuild inventory.
“This cannot persist much longer, and imports in due course will drop outright, and net trade will boost GDP growth in Q2 and/or Q3.”
Wall Street pundits don’t expect a recession to actually happen in the near future. However, another drag on the economy is about to come — interest rate hikes that the Federal Reserve plans to roll out in a series in the coming months as a way to slow inflation.
So, while most economists still believe that the economy will avoid dipping into a full recession, there are risk indicators that continue to rise.