The U.S. economy shrank last quarter into negative growth, the first contraction since the early days of COVID lockdowns in 2020, alongside a ballooning trade deficit and softer inventory growth.
Gross domestic product fell at a 1.4% annualized rate after a 6.9% pace of growth at the end of 2021, the Commerce Department’s preliminary estimate showed Thursday. The median forecast in a Bloomberg survey of economists was for a 1% increase.
Together, net exports and inventories subtracted about 4 percentage points from headline growth.
Against a backdrop of quicker inflation, the figures will likely keep Federal Reserve monetary policy geared for a half-point hike in interest rates next week. Nonetheless, Fed officials need to balance that policy tightening with risks associated with building price pressures.
The negative growth rate missed even the subdued Dow Jones estimate of a 1% gain for the quarter. GDP measures the output of goods and services in the U.S. for the three-month period.
Prices increased sharply during the quarter, with the price index for gross domestic purchases surging 7.8% in the three-month period, following a 7% gain in the fourth quarter of 2021.
The decline in growth came due to a deceleration in private inventory investment, which helped propel growth in the back half of 2022. Other restraints came from exports and government spending across state, federal and local governments, as well as rising imports.
An 8.5% pullback in defense spending was a particular drag, knocking one-third of a percentage point off the final GDP reading.
Consumer spending held up fairly well for the quarter, rising 2.7% as inflation kept pressure on prices. However, a burgeoning trade deficit helped shave 3.2 percentage points off growth as imports outweighed exports.
The personal consumption expenditures price index excluding food and energy, a preferred inflation measure for the Fed, rose 5.2% in the quarter, well above the central bank’s 2% inflation target.
MacDailyNews Take: So predictable.
‘Tis best to get a handle on inflation, if you know how, while you still can. – MacDailyNews, May 11, 2021
Earlier this year, Interactive Brokers founder Thomas Peterffy said, “Inflation is 7% — 1% or 2% [in interest rate hikes] doesn’t mean anything. If they really wanted to stop inflation, they would have to raise rates to 4%, 5%, 6%.”
Inflation is repudiation. — Calvin Coolidge
When a business or an individual spends more than it makes, it goes bankrupt. When government does it, it sends you the bill. And when government does it for 40 years, the bill comes in two ways: higher taxes and inflation. Make no mistake about it, inflation is a tax and not by accident. — Ronald Reagan
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