The U.S. economy unexpectedly shrank at a 1.4% annualized rate in the first three months of 2022 after more than a year of rapid growth, according to a Bureau of Economic Analysis report released Thursday. The new data is fueling concerns about a recession in the future amid steady inflationary pressures and uncertainty over the war in Ukraine.
The slowdown – the first since the covid-19 recession in April 2020 – marks a reversal from the torrid pace that followed intense fiscal and monetary stimulus in the wake of the pandemic. Last year, for example, the U.S. economy grew by 5.7%, the fastest full-year clip since 1984.
While most economists still believe the expansion has plenty of momentum, particularly given the strength of the job market, recession fears have been rising, as inflation shows little signs of easing. The weakness comes amid worrisome signs that some of the world’s largest economies, including China and Europe, are grinding to a standstill; for example, the International Monetary Fund slashed estimates for global economic growth just last week.
“There are definitely clouds on the horizon,” said Kenneth Rogoff, an economics professor at Harvard University and former IMF chief economist. “You can’t read too much into this number, but I do have significant concerns about the risk of recession, both in the U.S. and also in Europe and China, possibly all reinforcing each other like the perfect storm.”
Among the factors dragging down the economy at the beginning of 2022 were a reduction in retailers’ inventory purchases and a growing gap between U.S. exports and imports. The country’s trade deficit for goods – the difference between incoming and outgoing products – widened to a record high in March, the Commerce Department reported this week.
In addition, many businesses bought less inventory than they normally would in early 2022 because they had leftover merchandise from late last year, when they stocked up on extra goods to guard against supply chain shortages and delays. That drop in purchasing is likely to artificially drag down GDP numbers, economists say.
“We’ve got 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 created 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 are continuing to spend and invest.
Even so, the contraction creates new complications for the Biden administration and Democratic lawmakers, who until now have pointed to the strong recovery as a sign that the country is on the right track. Congressional Democrats scrambled Thursday to assuage voters who already harbored doubts about the economic recovery just months before a critical election.
President Biden, however, brushed off fears of a sustained downturn, saying he is “not concerned about a recession,” when asked about the possibility of one. In a statement, Biden attributed the negative GDP reading to “technical factors” and called on Congress to draft legislation that would support U.S. manufacturing.
“The American economy – powered by working families – continues to be resilient in the face of historic challenges,” Biden said in a statement. “We need to keep making progress – cutting costs for working families, making more in America, and creating good-paying jobs you can raise a middle-class family on.”
Sensing an opening, many Republicans ratcheted up attacks on Biden and political allies Thursday, saying they had failed to anticipate the trouble on the horizon.
“Runaway inflation is crushing working American families on Democrats’ watch,” Senate Minority Leader Mitch McConnell, R-Ky., said on the Senate floor Thursday. “No longer are Democrats just presiding over a disappointing recovery; now they’ve thrown the recovery into reverse, and they’re going backwards.”
One of the economy’s biggest pressure points is inflation. Prices have risen 8.5% in the last year, posing the defining challenge for the Biden administration and the Federal Reserve.
The latest slowdown adds a new wrinkle to the Fed’s challenge of curbing 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 corral soaring prices, is expected to hike rates again next week. The Fed isn’t expected to change course on hiking rates in May, but the negative GDP data could influence future rate hikes, as the Fed had forecast as many as seven this year.
“It’s very difficult to both bring down inflation and not have a recession right now,” Rogoff said. “It’s possible the Fed can do it, but more likely than not, in a year and a half we either have a recession or high inflation – if not both.”
The Fed’s effort has already begun to curb demand for some big-ticket purchases. New-home sales have fallen for three months in a row, as rising interest rates deter would-be home buyers. Mortgage rates, which for years hovered around 3%, exceeded 5% this month for the first time in over a decade.
Chuck Wilson, co-owner of Boston Builders, a custom home builder in Westminster, Md., 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 – has gotten costlier, he added.
“Home buyers are pulling back because interest rates are going up, and prices are through the roof,” Wilson said. “I’m finishing up a house now, but I don’t have any new contracts signed. 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 over whether the latest reading represents a one-time deceleration or a sign that the economy is taking a turn for the worse. Many still say they expect the economy to bounce back later this year, with GDP growing between 2.5 and 3.5% in 2023, despite bumps along the way.
“When the Fed has to raise interest rates as far as they say they’re going to, recession risks are high,” said Mark Zandi, chief economist at Moody’s Analytics. “There’s just no graceful way for the economic plane to land on the tarmac. It might land without crashing, but it’s going to be a scary ride.”
Consumer spending – which makes up two-thirds of the economy – remained solid despite persistent inflation. Americans continued to spend heavily on services, such as dining out, travel and entertainment during the first quarter, even though they pulled back on some goods, including clothing, shoes and furniture. Retail giant Amazon on Thursday reported a quarterly loss of $3.84 billion, its first since 2015, related to its investment in the electric vehicle maker Rivian. Disappointing sales growth, which analysts attributed to a slowdown in online shopping, sent the company’s stock tumbling nearly 10% in after-hours trading. (Amazon founder Jeff Bezos owns The Washington Post.)
But Americans are still spending out in other ways. Credit card companies Visa, American Express and Mastercard all reported robust spending rebounds in the first quarter, particularly as Americans began booking vacations and traveling internationally again.
Brian Chima, a travel agent in Akron, Ohio, said bookings are up 70% from a year ago. After putting off international vacations for two years, he said clients are finally ready to visit destinations such as Mexico, Italy, France and the Dominican Republic again.
“It is a night-and-day difference from 2021,” he said. “Travel has truly come back, and it’s great.”
But not all households and business are optimistic. Some say dwindling stimulus funds, combined with higher prices, have made them antsy about future spending power. Wil Owens, who owns an online business selling African beauty products in Upland, Calif., said he’s feeling that trepidation both as a consumer and business owner. Sales have been spotty this year, and he’s started dipping into his retirement to make ends meet.
“There’s so much uncertainty, so people are sitting on their money; I know I am,” said Owens, 69. “I’m an old guy, and I don’t have any family close enough to borrow from. What I have is what I have, and that’s frightening when prices are going up everywhere.”
Prices could trend even higher in coming months and threaten the global economic recovery, given continued supply chain shocks from the war in Ukraine and widespread lockdowns in China. Economists say those international crises could also further temper demand for U.S. exports, which have struggled to bounce back after the pandemic.
The IMF now expects the world economy to grow by 3.6% in 2022, down from a previous forecast of 4.4%.
– – –
The Washington Post’s Tony Romm contributed to this report.