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The U.S. economy unexpectedly contracted an annualized 1.4 percent in the first three months of 2022 after more than a year of rapid growth, according to a Bureau of Economic Analysis report released on Thursday. The new data is stoking fears of a recession amid steady inflationary pressures and uncertainty over the war in Ukraine.
The slowdown – the first since the April 2020 Covid recession – marks a reversal of the rapid pace that followed intense fiscal and monetary stimulus in the wake of the pandemic. Last year, for example, the US economy grew 5.7 percent, the fastest full-year growth since 1984.
While most economists still believe the expansion has plenty of momentum, especially given the strength of the job market, recession fears have increased as inflation shows little sign of slowing down. The weakness comes amid worrying signs that some of the world’s largest economies, including China and Europe, are grinding to a halt.
“There’s definitely clouds on the horizon,” said Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund. “You can’t glean too much from this number, but I have significant concerns about the risk of a recession, both in the US and in Europe and China, all potentially reinforcing each other like the perfect storm.”
Factors dragging the economy lower in early 2022 included a decline in retailers’ inventory purchases and a widening gap between US exports and imports. The country’s trade deficit in goods — the difference between incoming and outgoing products — widened to a record high in March, the Commerce Department reported this week.
Additionally, many companies were buying less inventory than usual in early 2022 because they had leftover merchandise from late last year when they stocked up on additional merchandise to prevent bottlenecks and supply chain delays. That drop in buying is likely to artificially drag down GDP numbers, economists say.
“We have a resilient economy, but we’re starting to show signs of weakness,” said Diane Swonk, chief economist at Grant Thornton. “The reality is that rate hikes and higher prices have consequences.”
Quiet, many parts of the economy remain resilient. Employers have added more than 400,000 jobs for 11 straight months, taking the unemployment rate to a new pandemic low and near a decade low. And despite higher costs, families and businesses continue to spend and invest.
Even so, the contraction creates new complications for the Biden administration and Democratic lawmakers, who have so far pointed to the strong recovery as a sign the country is on the right track.
One of the biggest pressure points in the economy is inflation. Prices have risen 8.5 percent over the past year, posing a crucial challenge for the Biden administration and the Federal Reserve.
The central bank began raising interest rates last month in hopes of slowing the economy enough to corral prices, and Democrats are considering new strategies they hope could address high gas prices.
Fed efforts have already begun to contain demand for some large-volume purchases. New home sales have declined for three straight months as rising interest rates deter potential homebuyers. Mortgage rates, which have hovered around 3 percent for years, topped 5 percent this month for the first time in over a decade.
Chuck Wilson, co-owner of Boston Builders, a homebuilder in Westminster, Maryland, said demand for new homes has slowed significantly in recent weeks following the Fed’s decision. At the same time, almost every component — including clapboards, siding and lumber — has become more expensive, he added.
“Homebuyers are pulling out because interest rates are rising and prices are going through the roof,” Wilson said. “I’m finishing a house right now, but I haven’t signed any new contracts. There is very little good to report.”
Economists say some kind of slowdown was inevitable given the economy’s rapid recovery over the past year. However, they remain divided on whether the latest readings are a one-off slowdown or a sign that the economy is deteriorating. Many still expect the economy to recover later this year, with gross domestic product growing between 2.5 and 3 percent in 2023 despite some setbacks.
“If the Fed has to hike rates as much as they say, the risks of a recession are high,” said Mark Zandi, chief economist at Moody’s Analytics. “There is simply no elegant way for the economy aircraft to land on the tarmac. It might land without crashing, but it’s going to be a scary ride.”