US economy contracts faster than anticipated in Q1: Bureau of Economic Analysis

The economy contracted more than previously expected in the first quarter. Here’s what economists are saying.  (iStock)

Real gross domestic product (GDP) contracted in the first quarter of 2022, faster than previously expected, according to the second estimate from the Bureau of Economic Analysis (BEA). 

GDP decreased at an annual rate of 1.5% in the first quarter of this year, a drop from the previously expected decrease of 1.4% in the advanced estimate, according to the BEA. This decrease was mainly due to revisions to private inventory investment and residential investment, but was partially offset by an upward revision in consumer spending. 

The BEA also said that the United States’ economy continues to feel the effects of the COVID-19 pandemic, although it’s impossible to calculate how much of the economic slowdown is due to it since the GDP data can’t be separated. 

“In the first quarter, an increase in COVID-19 cases related to the Omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country,” the BEA stated. “Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased as provisions of several federal programs expired or tapered off.”

Meanwhile, inflation continues to surge, price changes are increasing and the price index for gross domestic purchases jumped 8% in the first quarter, compared to an increase of 7% in the fourth quarter, according to the report. The personal consumption expenditures price index — which is another measure of inflation — jumped 7%, compared to an increase of 6.4% in the fourth quarter of 2021.

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Does drop in GDP signal a recession?

There are clashing opinions among economists when it comes to the possibility of a recession in 2022. A recession occurs when the country’s economy sees two consecutive quarters of contractions. Since the GDP growth rate was strong in the fourth quarter — at 6.9% — it would have to contract once again in Q2 to launch the economy into a recession.

“Perhaps not surprisingly, the step back in economic growth to start the year has stoked fears that the economy is slipping into a recession,” Wells Fargo stated in its most recent economic outlook. “However, as we noted at the time, the contraction is, in part, payback for the robust 6.9% rate of growth experienced in final quarter of 2021.”

Wells Fargo projected that GDP will amount to 2.4% in 2022 and cool to 2% in 2023. Some economists, though, were more concerned. Economists at Goldman Sachs noted that historical patterns would suggest the overheated labor market is causing concern for a recession. They forecasted a 15% chance of a recession in the next 12 months and a 35% chance in the next 24 months.

Earlier this month, Bank of America economists said that the risks of a U.S. recession are rising, given the GDP reading that showed the economy contracted 1.4% in the first quarter.

“That said, slower-than-expected real GDP growth – not a recession – is our operating base case for the U.S. over the next 12 to 18 months,” Bank of America stated in its outlook. 

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Fed remains on course for future rate hikes

Despite the lower-than-expected GDP and the threats of a recession, the Federal Reserve continues to plan for further interest rate hikes this year and into 2023. The latest Federal Reserve meeting minutes released Wednesday show that Fed officials indicated they’re prepared to move ahead with multiple 50-basis-point interest rate hikes in the coming months.

“Most participants judged that 50 basis-point increases in the target range would likely be appropriate at the next couple of meetings,” the minutes stated.

Members of the Federal Open Market Committee raised the federal funds rate by 50 basis points at its May meeting, the highest rate hike in two decades.

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