US economy shrinks in first quarter; trade, inventories mask underlying strength - BusinessWorld Online

April 29, 2022 | 12:02 pmWASHINGTON — The US economy unexpectedly contracted in the first quarter amid a resurgence in coronavirus disease 2019 cases and a drop in pandemic relief money from the government, but the decline in output is misleading as domestic demand remained strong.

“The economy is still showing some resilience, but the first-quarter GDP report signals the start of more moderate growth this year and next, largely in response to higher interest rates,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Despite the contraction, the Fed has little choice but to hike aggressively in May to corral inflation.”

“It is nonsense that real GDP declined,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.Front-loading by businesses fearful of shortages because of the Russia-Ukraine war contributed to a surge in imports. Exports tumbled, leading to a sharp widening of the trade deficit, which chopped 3.20 percentage points from GDP growth, the most since the third quarter of 2020. Trade has now been a drag on growth for seven straight quarters.

The loss of pandemic money to households from the government was partially offset by rising wages amid a tightening labor market. Government spending fell for a second straight quarter. At least $2 trillion in excess savings accumulated during the pandemic are providing a cushion against inflation. The housing market notched another second straight quarterly gain, but with the 30-year fixed mortgage shooting above 5%, the outlook is uncertain.

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