The economy contracted in the first quarter, but underlying metrics were strong

The U.S. economy contracted in the first three months of the year as supply constraints at home, demand shortfalls overseas and rapid in...


The U.S. economy contracted in the first three months of the year as supply constraints at home, demand shortfalls overseas and rapid inflation around the world weighed on a otherwise resilient recovery.

Gross domestic product, adjusted for inflation, fell 0.4% in the first quarter, the Commerce Department said Thursday. It was the first decline since the early days of the pandemic and a sharp reversal from the rapid growth of 1.7% in the last three months of 2021.

But the negative figure masked evidence of a recovery that economists said remained fundamentally strong. The decline – 1.4% on an annualized basis – is mainly the result of how inventories and trade figure into the calculation, as well as reduced government spending as Covid-19 relief efforts wind down. Underlying demand metrics showed solid growth.

More importantly, consumer spending, the engine of the U.S. economy, rose 0.7% in the first quarter despite soaring gasoline prices and the Omicron wave of the coronavirus, which limited restaurant spending. , travel and similar services in January.

“Consumer spending is the aircraft carrier in the middle of the ocean — it keeps moving forward,” said Wells Fargo chief economist Jay Bryson.

Yet that resilience could be tested in the coming months as the fastest inflation in four decades continues to wreak havoc. Consumer prices rose at an annual rate of 7% in the first quarter, and Americans’ after-tax incomes, adjusted for inflation, fell for the fourth consecutive quarter.

The proportion of Americans citing inflation as the most important financial problem for households has reached an all-time high in a Gallup Survey released Thursday. A total of 46% rated their personal finances positively, down from 57% a year ago, when a majority of households recently received rounds of direct federal aid.

Despite this bleak outlook, rising prices have yet to dampen consumers’ willingness to spend. But that will change if inflation continues to outpace income gains, said Beth Ann Bovino, chief U.S. economist for S&P Global. The savings rate in the first quarter fell below its pre-pandemic level for the first time as consumers saved less to keep spending.

“There is a tipping point,” she said. Over the course of the year, she added, “I expect households to start responding by bargaining, looking for deals, being less willing to pay higher prices.”

At the Melting Pot, a national chain of nearly 100 hot pot restaurants, revenue plummeted in early January as soaring coronavirus cases kept diners and employees at home. But bookings quickly rebounded and Valentine’s Day – “our Super Bowl”, said general manager Bob Johnston – was the strongest on record. Sales this spring are up 40% or more from 2019, and the growth would be even stronger if franchisees could hire enough people.

“We are unable to meet demand,” Johnston said. “We need more members in the squad and we are struggling to keep the bench full.”

The Melting Pot raises wages to attract workers and pays more for many ingredients. So far it has been able to raise prices to offset higher costs without losing customers, but Mr Johnston said he was unsure how long that would continue.

“We’re trying to be very careful with this and not believe too much that we can continue to raise prices without impact,” he said. “There might be a line that we can’t see, and we don’t want to cross that line.”

Republicans have taken advantage of rising prices to blow up President Biden’s economic policies. Thursday’s report gave them the opportunity to escalate that criticism.

“Accelerating inflation, a workers crisis and the growing risk of a significant recession are the hallmark economic failures of the Biden administration,” said Rep. Kevin Brady of Texas, the top House Ways Republican. and Means Committee, in a press release.

The White House sought to dismiss the decline in gross domestic product due to quirks in the data that did not reflect the overall strength of the economy.

“While last quarter’s growth estimate was impacted by technical factors, the United States faces the challenges of Covid-19 around the world, Putin’s unprovoked invasion of Ukraine and to global inflation from a position of strength,” Biden said in a statement after the press release, referring to Russian President Vladimir V. Putin.

Indeed, the weakness in the first quarter was partly related to the strength of the US recovery relative to the rest of the world. US retailers responded to consumer demand by importing more. At the same time, US exports have lagged due to weaker economic growth overseas. As a result, the trade deficit exploded, taking more than three percentage points off the change in gross domestic product in the first quarter.

“The moral of the story is that the Omicron wave, the war in Ukraine and the new lockdowns in China have cost growth abroad more than they have at home,” said Diane Swonk. , chief economist at the accounting firm Grant Thornton. “Domestic spending has been remarkably resilient. In fact, it accelerated.

The slowdown in inventory expansion reduced growth by nearly another percentage point. Businesses rushed to stockpile at the end of 2021 to ensure supply chain disruptions didn’t leave them with empty shelves over the festive period. This meant they didn’t have to do as much restocking as usual in the new year.

A measure of underlying growth that excludes the effects of inventories and trade rose 0.6% in the first quarter, adjusted for inflation. This is a modest acceleration from the end of last year.

Still, economists have cautioned against completely ruling out inventory and trade effects. Both reflect the challenges domestic producers face in meeting soaring consumer demand.

“If we’re importing things rather than making them here, it shows we’re demanding more than we can produce,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. “This suggests that our economy simply does not have the capacity to meet demand.”

The Federal Reserve is trying to dampen demand by raising interest rates, which policymakers hope will bring inflation under control. But Russia’s invasion of Ukraine and a new round of Covid lockdowns in China have complicated its job by prolonging supply disruptions, which the central bank can do little about.

Matt Younger, owner of a small construction company in Annapolis, Maryland, faces long delays and higher prices for just about everything that goes into building a home: two-by-fours, plywood, windows, garage doors.

“It’s like playing a game of chess – I have to be a few moves ahead of everything in case I can’t get something,” he said.

Today, rising interest rates threaten to cool the booming real estate market. Mortgage applications fell sharply, sales of New and existing houses have also fallen, and anecdotal evidence from across the country suggests that the wild bidding wars that have characterized the residential real estate market for much of the past two years could start to fade.

So far, however, none of this has led to a slowdown in construction activity. Residential construction rose 0.5% in the first quarter, only slightly slower than in the last quarter of 2021, and building permit applications increased in March. Mr. Younger’s business is still booming.

Mr. Younger said he stopped offering fixed-price contracts because he could not be sure in advance of the cost of his materials. Eventually, he suspects some renovation clients will scale back projects to fit their budgets. But in terms of new homes, there’s such a shortage of housing in the Washington area that he doubts demand will dry up — and even if sales slow, he can still rent the homes he’s building.

However, further up the supply chain, some companies are in a hurry.

Marilyn Santiago runs Creative Architectural Resin Products, a Florida-based manufacturer of faux wood beams, shutters, and other decorative elements for homes. Ms. Santiago, like Mr. Younger, has seen the cost of her materials skyrocket in recent months. But it’s struggling to pass those increases on to its homebuilder customers, as they look for ways to cut their own costs.

Construction delays are also taking their toll on Ms. Santiago’s business. Its products can usually only be installed after a home’s windows, and with windows out of stock across the country, its warehouse is overflowing with finished parts that should have been delivered months ago.

“If you come to my house, you’re going to see a bunch of brackets, and my truck is also a warehouse,” she said.

Now Ms. Santiago is planning to buy a new warehouse, but storage prices have also skyrocketed.

“It’s like everyone is taking advantage of the situation – and we as small business owners are basically the punching bag of the supply and demand world,” she said. .

Jeanna Smialek, Joseph Smith Heel and Ana Swanson contributed report.

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Newsrust - US Top News: The economy contracted in the first quarter, but underlying metrics were strong
The economy contracted in the first quarter, but underlying metrics were strong
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