The U.S. economy shrank in the first three months of the year, and faces threats from high inflation and rising interest rates, yet economists foresee a return to growth for the rest of 2022 based on the strength of the job market and consumer spending.
The 1.4% quarterly decline in gross domestic product - the first contraction since the pandemic hit in 2020 -- is not likely a prelude to recession, economists say. That may bring little comfort to President Joe Biden and Democrats, who face mid-term elections this year in which rising prices for food, energy and other essentials will be a major theme of Republican opposition.
Two trends drove the U.S. economy’s decline last quarter, according to Thursday’s report from the Commerce Department:
- Imports soared nearly 20% as Americans spent heavily on foreign-made goods, while exports fell almost 6% as growth slowed overseas - a widening of the trade deficit that subtracted 3.2 percentage points from GDP.
- Businesses restocked their shelves at a slower pace at the start of the year. That's because they had rebuilt inventories aggressively ahead of last year's holiday shopping season, when they feared pandemic-related supply shortages.
As a result, first quarter GDP - the nation’s total output of goods and services - fell far below the 6.9% annual growth in the fourth quarter of 2021.
However, rising wages bolstered spending by households, and higher profits drove investment by companies. Together these factors suggest strong fundamentals for the U.S. economy, even in the face of challenges from the pandemic, the war in Ukraine and the Federal Reserve's plans to raise interest rates to fight inflation.
"The report isn’t as worrisome as it looks,” said Lydia Boussour, lead U.S. economist at Oxford Economics. "The details point to an economy with solid underlying strength that demonstrated resilience in the face of Omicron, lingering supply constraints and high inflation.”
The U.S. economy is in an unusual and challenging position.
The job market - the most important pillar of the economy - remains robust, with the unemployment rate near a 50-year low of 3.6%, and wages rising steadily. And in the January-March quarter, businesses and consumers increased their spending at a 3.7% annual rate after adjusting for inflation.
Economists consider these trends a better gauge of the economy’s core strength than the latest GDP figure.
