GDP contracted at a 1.4% annualized rate in the first quarter, the Bureau of Economic Analysis reported Thursday morning, meaning that slowing commerce added to the woes of high inflation.
The decline in GDP, which is adjusted for inflation, is a major reversal from the previous quarter, when growth soared to a 6.9% rate as businesses began healing faster from the pandemic. It’s the first such contraction since the second quarter of 2020, when the economy suffered the massive shock of coronavirus shutdowns.
Friday’s report means that President Joe Biden now has to contend with bad GDP numbers, in addition to the soaring inflation that has strained households and driven down his approval ratings. Inflation rose to 8.5% in March, according to the consumer price index.
Still, details within Thursday’s report showed that underlying momentum is stronger than the headline number would make it seem.
ANXIOUS FED SET FOR HISTORIC MEASURE TO TRY TO CURB INFLATION
“This contraction is seen as less worrisome because it reflects a widening trade deficit and big swings in inventories, along with a decline in government spending,” said Mark Hamrick, the senior economic analyst for Bankrate. “Key drivers including consumer and business spending have been holding up.”
Consumer spending grew at a healthy 2.7% annual rate.
The decline in GDP was instead driven by factors that do not relate to future growth. Specifically, much of the decline in the first quarter was driven by a decline in exports and a sharp increase in imports, which subtract from the headline GDP number. A decline in businesses buying inventories also shaved about 0.8 percentage points from the overall GDP growth rate.
A measure of economic growth in Friday’s report that strips out those factors, final sales to private domestic purchasers, grew at a strong 3.7% annual rate.
Other economic data suggest that the economy, for now, has some momentum despite the formation of some serious headwinds. Monthly job gains have been strong. Claims for unemployment benefits, seen as a high-frequency gauge of layoffs, have been running at the lowest rates in decades.
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Overall, the outlook is one of an economy that still features too much spending generating too much inflation. Friday’s report is not likely to dissuade the Federal Reserve from taking historic steps to tighten monetary policy.
