U.S. Economy Shrank 1.4% Last Quarter In Worst Showing Since Covid Recession, New GDP Estimate Shows

Topline

The economy last quarter posted its worst annualized showing since the pandemic-induced recession in 2020, the government said Thursday, blaming an unexpected decline in economic activity on the omicron variant of Covid-19 and decreased government assistance.

The government blamed the unexpected decline on the omicron variant of Covid-19 and decreased … [+] government assistance.

AFP via Getty Images

Key Facts

Despite economist expectations calling for growth of 1%, the U.S. economy shrank at an annual rate of 1.4% in the first quarter of 2022—the first decline since the second quarter of 2020, the Bureau of Economic Analysis estimated in its Wednesday gross domestic product release.

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, the government said.

The decrease reflected broad declines in exports, government spending and business inventories, along with increased imports, according to the release.

In an email after the report, 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.

On an annual basis, consumer spending rose 2.7% in the first three months of the year, its fastest rate since the second quarter of 2021, the government said, while business investments surged 7.3%.

The overall drop stands in stark contrast to the economy’s better-than-expected growth of 7% 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.

Crucial Quote

“Forecasts for growth for the full year suggest a better showing in the coming months,” Hamrick said Thursday, though he cautioned: “Among the key questions for the balance of this year is whether inflation begins to weigh on the job market and the broader economy because consumers are pressured to cut back.”

Key Background

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. The stock market posted its worst showing since the market crash in early 2020 last quarter, with the S&P falling 5% and the tech-heavy Nasdaq tumbling 9%. In a note to clients last month, Bank of America’s Ethan Harris said inflation risks are low now, but will be higher next year. The analyst is particularly worried that stronger-than-anticipated Fed tightening, combined with an oil price shock or other unforeseen event, could pose a “serious risk” of a recession, defined as two consecutive quarters of negative economic growth. The bank said it expects faster rate hikes in light of sustained inflation and lowered its forecast for gross domestic product growth next year to 1.7% from 1.8%, compared to 5.7% last year.

What To Watch For

On May 26, the government will release an updated first-quarter GDP estimate based on more complete data.

Chief Critic

“Today’s shock drop in GDP is a wake-up call that the economy isn’t as strong as we all thought,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said Thursday. “It’s possible that GDP gets revised higher next month, as this is just the first release and there will be two revisions, but it is a warning sign.”