U.S. Economy Shrank 1.5% Last Quarter In Worst Showing Since Covid Recession, New GDP Estimate Shows
The economy last quarter posted its worst annualized showing since the pandemic-induced recession in 2020, the government said in an updated release Thursday, blaming an unexpected decline in economic activity on the omicron variant of Covid-19 and decreased government assistance.
The U.S. economy shrank at an annual rate of 1.5% in the first quarter of 2022—the first decline since the second quarter of 2020, the Bureau of Economic Analysis estimated Wednesday in a worse-than-expected update to last month’s figure, which showed a decline of 1.4%.
The update primarily reflected softer-than-expected spending on business inventories and residential investments, which was only partially offset by an uptick in consumer spending, the government said.
In the first quarter, a record wave of Covid-19 cases spurred by the omicron variant resulted in continued restrictions and business disruptions, while government assistance programs including forgivable loans to businesses and social benefits to households expired or tapered off—further preventing growth, according to the release.
Broad declines in exports, government spending and business inventories, along with increased imports, spurred the overall decline, the government said.
On an annual basis, consumer spending rose 3.1% in the first three months of the year, its fastest rate since the second quarter of 2021, the government said, while business investments surged 6.8%.
The overall drop stands in stark contrast to the economy’s better-than-expected growth of 6.9% in the fourth quarter, the fastest rate in nearly 40 years, thanks in part to a jump in exports and increased inventory investments by car dealers.
In an email after last month’s initial report, which was markedly worse than expectations for 1% growth, Bankrate analyst Mark Hamrick said the estimate serves as a reminder of the “volatile and complicated times in which we live,” but that the contraction is “less worrisome” because key drivers of economic growth, such as consumer and business spending, have been holding up despite the widening trade deficit and big swings in business inventories.
“We continue to expect a solid rebound in second-quarter growth, but our initial hopes of a 5%-plus print have faded a bit,” Pantheon Macro chief economist Ian Shepherdson said in a note after Thursday’s release, adding that a reading closer to 4% now seems more likely.
Though the economy quickly bounced back after the Covid recession in 2020, the Federal Reserve’s withdrawal of pandemic stimulus measures, Russia’s invasion of Ukraine and lingering Covid restrictions have heightened market uncertainty this year. Last quarter, the stock market posted its worst showing since the market crash in early 2020, with the S&P falling 5% and the tech-heavy Nasdaq 9%. “Recession risks are high—uncomfortably high—and rising,” Mark Zandi, chief economist at Moody’s Analytics, said in a weekend note. “For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.”