US gross domestic product contracted at 1.4% year on year in the first quarter as supply disruptions weighed heavily on the economy, although strong consumer and business spending suggested growth would resume.
The decline in US gross domestic product marked a sharp reversal of 6.9% annual growth rate in the fourth quarter, the Commerce Department said Thursday. The first quarter was the weakest since the spring of 2020, when the Covid-19 pandemic and related shutdowns plunged the US economy into a deep, albeit brief, recession.
The decline stems from a growing trade deficit, with the United States importing much more than it exports. The slower pace of business investment in inventories in the first quarter – compared to the rapid accumulation of inventories at the end of last year – also led to lower growth. In addition, declining government incentives related to the pandemic weighed heavily on GDP.
Consumer spending, the main driver of the economy, grew by 2.7% year on year in the first quarter, a slight acceleration from the end of last year. The business also invested more money in equipment and research and development, which caused a 9.2% increase in business costs.
“The most important aspects of the national economy held up better than at the end of 2021, when growth was up,” said Diane Swank, chief economist at Grant Thornton, in a note.
Two years after the pandemic hit, the US economy is facing challenges, including supply disruptions related to the pandemic and the war in Ukraine, labor shortages and high inflation. Central bank officials raised their reference interest rate in March by a quarter of a percentage point from close to zero to curb inflation, and signaled further increases are likely.
Many economists believe the economy can withstand higher interest rates and return to modest growth in the second quarter and beyond, in part because consumers and businesses continue to spend.
Americans are spending more on services amid lower overall Covid-19 cases and the removal of remaining pandemic restrictions. Travel is a key example: hotel occupancy has been rising since January and more people are boarding.
George Lewis, co-owner of the Brass Lantern Inn in Stowe, Virginia, is seeing a surge in demand. Visits to his Maple Street breakfast bed are on the rise, with rooms selling out some weekends this spring, a sharp change from the pandemic earlier, when the inn relied on help from small businesses to survive.
“People were calling, ‘Are you really sold?'” Mr Lewis said. “I say, ‘Yes, yes, we’re really sold out.'”
Still, Mr. Lewis is more concerned about business next year. On the one hand, it is not clear where inflation will be, he said. Prices have already risen sharply for oil for heating rooms, as well as for cheddar cheese, which Mr Lewis uses in layers of eggs, a breakfast casserole he serves on Saturdays.
Consumer spending is another wild card, he added.
“We don’t know what people’s pocketbooks can hold after this year,” he said. “Some people spend … regardless of the price.”
GDP growth, percentage contributions of selected categories
Consumption of goods
(pcs.)
Accumulation of
inventories
driven by GDP
higher later
last year…
… but so far
this year
delay
has weighed
on growth.
Trade
there was a deficit
also sliding
on growth.
Consumption of goods
(pcs.)
Accumulation of
inventories
driven by GDP
higher later
last year…
… but so far
this year
delay
has weighed
on growth.
Trade
there was a deficit
also sliding
on growth.
Consumption of goods
(pcs.)
Accumulation of
inventories
driven by GDP
higher later
last year…
… but so far
this year
delay
has weighed
on growth.
Trade
there was a deficit
also sliding
on growth.
Goods
spending
(pcs.)
Accumulation of
inventories
driven by GDP
higher later
last year…
… but so far
this year
delay
has weighed
on growth.
Trade
deficit
it was too
dragging
growth.
Goods
spending
(pcs.)
Looking ahead, economists surveyed by The Wall Street Journal estimate that GDP will grow by 2.6% in the fourth quarter of 2022 compared to a year earlier, in line with annual growth in 2019, but significant below 5.5% growth registered last year.
The labor market is a key source of economic power at the moment. Unemployment claims – a substitute for redundancies – were close to historically low levels and fell to 180,000 last week as employers clung to employees amid a shortage of available workers. Businesses rent and increase wages, supporting consumer spending.
However, high inflation reduces the purchasing power of households. Consumer prices rose 8.5 percent in March from a year earlier, a four-decade high. Rising inflation has wiped out many workers’ profits: average hourly wages have risen by 5.6% over the same period.
Rapidly rising prices are also a challenge for many businesses.
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Cratex Manufacturing Co., a manufacturer of 100 people, manufactures and sells industrial abrasives for other manufacturers to be used in the production of steel mills, jet blades and metal castings. The San Diego-based company has seen prices for materials it purchased – such as resin and rubber – rise between 5% and 30% last fall, said Ricker McCasland, president of Cratex.
At the same time, Cratex had to raise wages to keep workers.
“It’s a race to stay ahead of all these rising costs,” Mr McCasland said. He added that increases in commodity prices have outpaced Kratex’s ability to recover them through its own price increases.
Airlines, gas stations and retailers use sophisticated algorithms to adjust their prices in response to costs, demand and competition. WSJ’s Charity Scott explains what dynamic pricing is and why companies use it more often. Illustration: Adele Morgan
Write to Sarah Cheney Cambon at sarah.chaney@wsj.com
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