The economy unexpectedly shrank in the first quarter of 2022, marking the worst quarter economically in the past two years, according to new data released Thursday from the Bureau of Economic Analysis (BEA).
Real gross domestic product (GDP) decreased at an annual rate of 1.4%, according to the BEA's advance estimate. This is down significantly from the 6.9% GDP growth rate seen in the fourth quarter of 2021, marking the steepest drop since the spring of 2020. The drop was led by a fall in private inventory investments, exports, federal government spending and state and local government spending. Simultaneously, imports — which are a subtraction from the GDP — increased.
"The good news is that consumer spending remained strong, particularly for services, as much of that sector has returned close to pre-pandemic levels," Joel Kan, Mortgage Bankers Association (MBA) associate vice president of economic and industry forecasting, said. "Households continue to benefit from a strong job market and wage growth."
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It is time to start saying ‘recession?’
Although economic growth dwindled in the first quarter of 2022, it has not yet fallen to a recession level, typically defined by economists by at least two consecutive quarters of contractions in the GPD.
In its latest forecast, Fannie Mae predicted that GDP would grow by 7.4% in 2022, but could see a recession in 2023 by way of a 9.7% decline. Fannie Mae's forecast was a downgrade on growth from its previous outlooks, which stated that the Federal Reserve’s aggressive monetary policy and Russia’s invasion of Ukraine could slow economic growth.
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Inflation's impact on economic growth
Surging inflation is working against economic growth, as consumers are buying less in some areas amid rising prices, contributing in part to the contraction of the first quarter’s GDP. In fact, one expert pointed out that small businesses and families are taking the biggest hits amid the economic downturn.
"Today’s GDP numbers don’t reflect what’s happening on Wall Street, they reflect what’s happening on Main Street," Dan Berger, National Association of Federally Insured Credit Unions (NAFCU) CEO, said. "This incredible economic downturn continues to hurt small businesses and families, and it’s critical that Americans have access to financial services and products to get them through the uncertainties of this financial environment."
However, many areas of the economy remain strong, and the central bank will likely continue on its current path as it plans to raise interest rates, which could slow down inflation.
"Business investment had its largest contribution to overall growth in a year, indicating additional underlying strength in the economy," Kan said. "We expect the Fed to proceed with its plans to further tighten monetary policy over the course of 2022 as inflation has not shown signs of slowing yet, especially given the resilience in consumer spending."
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