The U.S. economy contracted in the first three months of the year, but strong consumer spending and continued business investment suggested that the recovery remained resilient.
Gross domestic product, adjusted for inflation, declined 0.4 percent in the first quarter, or 1.4 percent on an annualized basis, the Commerce Department said Thursday. That was down sharply from the 1.7 percent growth (6.9 percent annualized) in the final three months of 2021, and was the weakest quarter since the early days of the pandemic.
The decline was mostly a result of the two most volatile components of the quarterly reports: inventories and international trade. Lower government spending was also a drag on growth. Measures of underlying demand showed solid growth.
Most important, consumer spending, the engine of the U.S. economy, grew 0.7 percent in the first quarter despite the Omicron wave of the coronavirus, which restrained spending on restaurants, travel and similar services in January.
“Consumer spending is the aircraft carrier in the middle of the ocean — it just keeps plowing ahead,” said Jay Bryson, chief economist for Wells Fargo.
But choppy waters may lie ahead. The first-quarter data mostly predates the spike in gas prices that has accompanied Russia’s invasion of Ukraine and the lockdowns in China that have threatened to further disrupt global supply chains. The Federal Reserve in March raised interest rates for the first time since the pandemic began, and several more rate increases are expected this year as policymakers seek to tame the fastest inflation in four decades.
“We are watching a bunch of seismic changes in real time,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution.
The biggest challenge facing the economy is inflation. Consumer prices rose at a 7 percent annual rate in the first quarter, and Americans’ after-tax incomes, adjusted for inflation, fell for the fourth quarter in a row. So far, higher prices have done little to dampen consumers’ willingness to spend, but that will change if inflation keeps outpacing income gains, said Beth Ann Bovino, chief U.S. economist for S&P Global.
“There’s a tipping point,” she said. Sometime this year, she added, “I’m expecting to see households starting to respond either by trading down, looking for deals, being less willing to pay higher prices.”
Source: Economy - nytimes.com
