The U.S. economy unexpectedly contracted at an annualized rate of 1.4% in the first three months of 2022 after more than a year of rapid growth, according to a Bureau of Economic Analysis report released Thursday. The new data is fueling worries about a recession amid continued inflationary pressures and uncertainty over the war in Ukraine.
The slowdown – the first since the covid recession in April 2020 – marks a reversal from the frantic pace that followed the intense fiscal and monetary stimulus in the wake of the pandemic. Last year, for example, the US economy grew 5.7%, the fastest annual clip since 1984.
While most economists still believe the expansion has plenty of momentum, especially given the strength of the labor market, recession fears have increased as inflation shows few signs of slowing. The weakness comes amid worrying signs that some of the world’s largest economies, including China and Europe, are stalling.
“There are definitely clouds on the horizon,” said Kenneth Rogoff, professor of economics at Harvard University and former chief economist at the International Monetary Fund. “You can’t read too much into that number, but I have significant concerns about risk or recession, both in the US and in Europe and China, which are perhaps mutually reinforcing like the perfect storm. “
Among the factors that weighed on the economy in early 2022 were a reduction in inventory purchases by retailers and a growing gap between U.S. exports and imports. The country’s merchandise trade deficit — the difference between incoming and outgoing products — widened to a record high in March, the Commerce Department reported this week.
Additionally, many companies bought less inventory than they normally would at the start of 2022 because they had leftover goods from late last year when they stocked up on additional goods for guard against supply chain shortages and delays. This drop in purchases is likely to artificially lower GDP figures, economists say.
“We have a resilient economy, but signs of weakness are starting to show,” said Diane Swonk, chief economist at Grant Thornton. “The reality is that rate hikes and higher prices have consequences.”
Still, many parts of the economy remain robust. Employers have added more than 400,000 jobs for 11 straight months, sending the unemployment rate to a new pandemic low and near a multi-decade low. And despite higher costs, families and businesses continue to spend and invest.
Even so, the contraction is creating new complications for the Biden administration and Democratic lawmakers, who so far have pointed to the strong recovery as a sign that the country is on the right track.
Inflation is one of the main pressure points in the economy. The prices were raised 8.5% last year, posing the defining challenge for the Biden administration and the Federal Reserve.
The central bank last month started raising interest rates in hopes of slowing the economy enough to contain prices, and Democrats are explore new policies they hope to be able to tackle high gas prices.
The Fed’s effort has already begun to dampen demand for some large purchases. New home sales have fallen for three consecutive months as rising interest rates deterred potential buyers. Mortgage rates, which have hovered around 3% for years, exceeded 5 percent this month for the first time in over a decade.
Chuck Wilson, co-owner of Boston Builders, a builder of custom homes in Westminster, Maryland, said demand for new homes has slowed markedly in recent weeks following the Fed’s decision. At the same time, just about every building component — including shingles, siding and lumber — became more expensive, he added.
“Homebuyers are pulling back as interest rates rise and prices explode,” 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 form of slowdown was inevitable, given the economy’s rapid recovery last year. But they remain divided on whether the latest reading represents a one-time deceleration or a sign that the economy is getting worse. Many still say they expect the economy to rebound later this year, with gross domestic product growing 2.5-3% in 2023, despite challenges along the way.
“When the Fed needs to raise interest rates as far as they say, recession risks are high,” said Mark Zandi, chief economist at Moody’s Analytics. “There is simply no graceful way for the economy aircraft to land on the tarmac. It might land without crashing, but it will be a scary trip.