The U.S. economy contracted 1.5% on an annualized basis in the first quarter of 2022, according to revised data released by the Bureau of Economic Analysis on Thursday. Economists surveyed by Refinitiv were expecting a seasonally adjusted annual contraction of 1.3%.
The new downward revision for gross domestic product, the broadest measure of goods and services produced across the economy, comes after a previously reported 1.4% contraction. It was the first drop in GDP since the second quarter of 2020 – in the depths of the COVID-19 recession – and followed a robust 6.9% expansion in the final three months of 2021.
The contraction was partially attributed to the nation spending more on imports from other countries than it did on U.S. exports. The trade gap slashed first-quarter GDP by 3.2 percentage points. Also contributing to the weakness was a slower restocking of goods in stores and warehouses, which had built up their inventories in the previous quarter for the 2021 holiday shopping season, knocking nearly 1.1 percentage points off the January-March GDP.
The data comes as inflation continues to run near a 40-year high and weigh on growth, with consumer price index, a wide-ranging measure of goods and services, including food, autos, gasoline, health care and rent, rising 8.3% in April from a year ago. Prices jumped 0.3% in the one-month period from March. On a monthly basis, average hourly earnings dropped 0.1% in March, when accounting for the inflation spike. On an annual basis, real earnings dropped 2.6% in April.
Despite the slowing growth and record-high inflation, consumer spending grew 3.1% on an annual basis from January through March. Employers have also added more than 400,000 jobs for 12 straight months and the unemployment rate is near a half-century low.
The economy is widely believed to have resumed its growth in the current quarter. In a survey released this month, 34 economists told the Federal Reserve Bank of Philadelphia that they expect GDP to grow at a 2.3% annual pace from April through June and 2.5% for all of 2022. Still, their forecast marked a sharp drop from the 4.2% growth estimate for the current quarter in the Philadelphia Fed’s previous survey in February.
The nonpartisan Congressional Budget Office has projected that GDP will grow 3.1% in 2022, driven by strong consumer spending and demand for services. The budget office expects growth to slow slightly in coming years, forecasting a GDP of 2.2% in 2023 and 1.5% in 2024.
Meanwhile, the CBO expects inflation will remain elevated in the near-term, with the consumer price index expected to hit 4.7% for the entirety of 2022. While that is down slightly from the 6.7% recorded in 2021 – the highest level in four decades – it's still significantly higher than the Federal Reserve wants. Inflation is not expected to fall to the Fed's preferred level of 2% until 2024, according to the CBO.
Minutes from the U.S. central bank's May 3-4 meeting released on Wednesday show that policymakers stressed the need to raise interest rates quickly in order to bring consumer prices closer to their 2% goal. Officials voted unanimously to raise the benchmark federal fund rate by 50 basis points earlier this month, and agreed that similarly sized hikes are on the table at upcoming meetings in June and July.
The Fed is banking on its ability to engineer a so-called soft landing: Raising borrowing rates enough to slow growth and cool inflation without causing a recession. Many economists, though, are skeptical that the central bank can pull it off. More than half the economists surveyed by the National Association for Business Economics foresee at least a 25% probability that the U.S. economy will sink into recession within a year.
Fox Business' Megan Henney and The Associated Press contributed to this report.