By CHRISTOPHER RUGABER
WASHINGTON (AP) — The U.S. economic system shrank final quarter for the primary time for the reason that pandemic recession struck two years in the past, contracting at a 1.4% annual price, however shoppers and companies stored spending in an indication of financial sturdiness.
The economic system’s total decline within the January-March quarter doesn’t imply a recession is probably going within the coming months. Most economists count on a rebound this quarter as stable hiring and wage positive factors maintain progress.
As a substitute, the regular spending by households and firms means that the economic system will doubtless maintain increasing this 12 months despite the fact that the Federal Reserve plans to boost charges aggressively to struggle the inflation surge. The primary quarter was hampered primarily by a slower restocking of products in shops and warehouses and by a pointy drop in exports.
“The report isn’t as worrisome because it seems to be,” mentioned Lydia Boussour, lead U.S. economist at Oxford Economics. “The small print level to an economic system with stable underlying energy that demonstrated resilience within the face of Omicron, lingering provide constraints and excessive inflation.”
The Commerce Division’s estimate Thursday of the primary quarter’s gross home product — the nation’s complete output of products and companies — fell far beneath the 6.9% annual progress within the fourth quarter of 2021. And for 2021 as a complete, the economic system grew 5.7%, the best calendar-year growth since 1984.
Along with a drop in enterprise inventories and a widening commerce deficit, the primary quarter’s weak displaying additionally mirrored a slowdown from final 12 months’s strong rebound from the pandemic, which was fueled partly by huge authorities assist and ultra-low rates of interest. With stimulus checks and different authorities helps having ended, shopper spending has slowed from its blistering tempo within the first half of final 12 months.
The economic system is in an uncommon place. Unemployment is close to a 50-year low, and wages are rising at a wholesome tempo. But critical threats have emerged from widespread disruptions abroad and rampant inflation, which is eroding shoppers’ spending energy. Final month, costs jumped 8.5% from a 12 months earlier, the quickest such rise in 4 a long time.
Final quarter’s destructive GDP quantity additionally undercuts a key political message of President Joe Biden. The president has pointed to speedy progress and robust hiring as a wholesome counterpoint to hovering inflation, which is very unpopular with voters and small companies.
Compounding Biden’s political difficulties, Russia’s invasion of Ukraine and rising COVID circumstances abroad are weighing on the economic system and heightening inflation pressures. Many corporations are additionally nonetheless struggling to acquire the components and provides they want from tangled provide chains.
Imports surged within the first quarter, an indication that among the provide snarls have eased. However ongoing lockdowns in China, together with at its largest port, Shanghai, are more likely to perpetuate shortages this 12 months. Ford and Basic Motors have each mentioned this week that they nonetheless can’t receive all of the semiconductor chips they should construct autos, costing them gross sales and forcing short-term plant closures.
A broader world slowdown can also be anticipated this 12 months, based on estimates final week by the Worldwide Financial Fund. The 190-nation lending group now foresees the disruptions of the Ukraine warfare and COVID slowing world progress to three.6% this 12 months from 6.1% final 12 months.
Nonetheless, the U.S. job market — an important pillar of the economic system — stays strong. The variety of individuals receiving unemployment advantages, a proxy for layoffs, fell to the bottom stage since 1970. And within the January-March quarter, companies and shoppers elevated their spending at a 3.7% annual price after adjusting for inflation.
Economists think about that pattern a greater gauge than total GDP of the economic system’s underlying energy. Most analysts count on the regular tempo of spending to maintain the economic system’s progress, although the outlook stays extremely unsure.
Final quarter’s slowdown adopted vigorous progress within the ultimate quarter of 2021, pushed by a surge in inventories as corporations restocked in anticipation of vacation season spending.
Imports surged practically 20% within the January-March quarter as companies and shoppers purchased extra items from overseas whereas U.S. exports fell practically 6%. That disparity widened the commerce deficit and subtracted 3.2 share factors from the quarter’s progress.
The weak spot of the economic system’s total progress price contrasts with the vitality of the job market. At 3.6%, the unemployment price is sort of again to the half-century low it reached simply earlier than the pandemic. Layoffs have reached traditionally low ranges as employers, tormented by labor shortages, have held tightly onto their employees.
Wages are rising steadily as corporations compete to draw and retain employees, a pattern that has helped keep shoppers’ capability to spend. On the identical time, although, that spending has helped gas inflation, which reached 8.5% in March in contrast with 12 months earlier.
Fed Chair Jerome Powell has signaled a speedy collection of price will increase to fight greater costs. The Fed is about to boost its key short-term price by a half-percentage level subsequent week, the primary hike that enormous since 2000. At the least two extra half-point will increase – twice the extra typical quarter-point hike — are anticipated at subsequent Fed conferences. They’d quantity to one of many quickest collection of Fed price hikes in a long time.
Powell is betting that with job openings at near-record ranges, shopper spending wholesome and unemployment unusually low, the Fed can sluggish the economic system sufficient to tame inflation with out inflicting a recession. But most economists are skeptical that the Fed can obtain that objective with inflation as excessive as it’s.
