The slowdown — the first since the covid-19 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; for example, the International Monetary Fund cut its estimates of global economic growth last week.
“There are definitely clouds on the horizon,” said Kenneth Rogoff, an economics professor at Harvard University and former chief economist of the IMF. “You can’t read too much into that number, but I have serious concerns about the risk of recession, both in the US and in Europe and China, which may be mutually reinforcing like the perfect storm.”
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Among the factors that dampened 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 businesses bought less inventory than they normally would in early 2022 because they had leftover goods from late last year when they stocked up on additional goods. to 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.
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Even so, the contraction creates 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. Congressional Democrats rushed Thursday to appease voters who were already harboring doubts about the economic recovery just months before a critical election.
President Biden, however, brushed off fears of a lasting downturn, saying he was “not concerned about a recession”, when asked about the possibility of a recession. In a statement, Biden attributed the negative GDP reading to “technical factors” and called on Congress to draft legislation that would support American manufacturing.
“The American economy — fueled by working families — continues to resist in the face of historic challenges,” Biden said in a statement. “We need to keep moving forward — lowering costs for working families, earning more in America, and creating good-paying jobs that you can raise a middle-class family on.”
Sensing an opening, many Republicans stepped up attacks on Biden and his political allies on Thursday, saying they hadn’t anticipated trouble on the horizon.
“Riding inflation is crushing working American families on Democrat watch,” Senate Minority Leader Mitch McConnell (R-KY) said Thursday. “Democrats are no longer content to preside over a disappointing recovery; now they’ve reversed the recovery and they’re backing off.
Inflation is one of the main pressure points in the economy. Prices have risen 8.5% over the past year, posing a major challenge for the Biden administration and the Federal Reserve.
The latest slowdown adds a new dimension to the Fed’s challenge to rein in inflation without sending the country into recession. The central bank, which last month began raising interest rates in hopes of slowing the economy enough to contain the price spike, is expected to raise rates again next week. The Fed is not expected to change course on the rate hike in May, but negative GDP data could influence future rate hikes, as the Fed had forecast up to seven this year.
“It’s very difficult to both get inflation down and not have a recession right now,” Rogoff said. “It’s possible the Fed could do it, but more likely than not, in a year and a half we’ll either have a recession or high inflation, or both.”
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, topped 5% this month for the first time in more than a decade.
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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 because interest rates are rising and prices are exploding,” 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 GDP growing between 2.5% and 3.5% in 2023, despite the challenges along the way.
“When the Fed needs to raise interest rates as far as they say, the risks of a recession 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.
Consumer spending, which accounts for two-thirds of the economy, remained strong despite persistent inflation. Americans continued to spend heavily on services, such as restaurants, travel and entertainment in the first quarter, even as they retired some goods, including clothing, shoes and furniture. Retail giant Amazon reported a $3.84 billion quarterly loss on Thursday, its first since 2015, related to its investment in electric vehicle maker Rivian. The disappointing sales growth, which analysts attributed to a slowdown in online shopping, sent shares of the company down nearly 10% in after-hours trading. (Amazon founder Jeff Bezos owns The Washington Post.)
But Americans spend in other ways too. Credit card companies Visa, American Express and Mastercard all reported strong spending rebounds in the first quarter, particularly as Americans resumed booking vacations and traveling abroad.
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Brian Chima, a travel agent in Akron, Ohio, said bookings were up 70% from a year ago. After postponing international vacations for two years, he said customers were finally ready to visit destinations such as Mexico, Italy, France and the Dominican Republic again.
“It’s a night and day difference from 2021,” he said. “The trip has really come back, and that’s great.”
But not all households and businesses are optimistic. Some say dwindling stimulus funds, combined with higher prices, have made them nervous about future purchasing power. Wil Owens, who owns an online business selling African beauty products in Upland, California, said he felt that apprehension as both a consumer and a business owner. Sales were spotty this year, and he began to dip into his retirement to make ends meet.
“There is so much uncertainty that people are sitting on their money; I know I am,” said Owens, 69. “I’m an old man and I don’t have close enough family to borrow from. What I have is what I have, and it’s scary when prices go up everywhere.
Prices could rise further in the coming months and threaten global economic recovery, given continued supply chain shocks from the war in Ukraine and widespread lockdowns in China. Economists say these international crises could also further temper demand for US exports, which have struggled to rebound from the pandemic.
The IMF now expects the global economy to grow by 3.6% in 2022, down from a previous forecast of 4.4%.
Tony Romm contributed to this report.