US economic growth unexpectedly contracted in the first quarter amid growing trade imbalances, rising inflation and supply chain disruptions.
The US commerce department reported that gross domestic product dropped 1.4 per cent on an annualised basis in the first quarter, down dramatically from the 6.9 per cent rise recorded in the fourth quarter of 2021.
That marks the first contraction of the economy since mid-2020, when Covid-19 lockdowns had curtailed activity. The data translates to a 0.4 per cent fall compared with the previous quarter, based on a measure used by other major economies.
The data comes as fears mount that inflation and aggressive tightening by the Federal Reserve will trigger an economic recession. A widely used indicator of recession — the inversion of the yield curve — briefly flashed red earlier this month.
US growth is being threatened by the highest inflation in 40 years as the Russian invasion of Ukraine has driven up commodity prices, and current lockdowns in Beijing herald further supply chain issues.
The Fed has indicated that it will respond to inflation forcefully, with markets pricing in a half percentage point rate rise at its next meeting in May. Investors in the futures market now expect the central bank to lift its key interest rate to 2.7 per cent by the end of the year, up from between 0.25 and 0.5 per cent today.
But the full effects of inflation and tighter monetary policy have not yet translated into GDP.
The headline figure belied ongoing strength in American household incomes. Personal consumption grew by 2.7 per cent in the first quarter, up from 2.5 per cent at the end of last year. That was nevertheless weaker than the forecast 3.5 per cent.
The strength in consumer spending was offset by the growing trade deficit, which hit a record high in March as import volumes and prices surged. The robust import demand, and change in the trade deficit, detracted from GDP, because it is a gauge of production.
A revision to how retail sales are calculated — announced by the census bureau on Monday — also curtailed growth in the first quarter, and is expected to bolster GDP in the second quarter.
Source: Economy - ft.com
