The US economy contracted in the first three months of the year, contracting by -0.4% in the first quarter or -1.4% on an annual basis, its weakest quarter since the first days of the pandemic.
Economic growth slowed significantly at the beginning of the year. In the last three months of 2021, US gross domestic product (GDP) – a broad measure of the economy – grew by 1.7% or 6.9% on an annual basis.
The trade department said the slowdown was caused by rising imports and declining investment in private stocks, exports, federal government spending and state and local government spending.
Consumer spending, the largest component of the US economy, rose 0.7% in the first quarter – by 2.7% year on year – despite the impact of the Omicron wave on the coronavirus.
The latest report was worse than economists expected, and was drawn up as the war in Ukraine sparked rising oil prices, which are still making their way through the economy, and before China imposes new coronavirus blockades that could worsen supply chain problems.
Paul Ashworth, chief US economist at Capital Economics, called the decline “unexpectedly serious”. But he said it was unlikely to deter the Federal Reserve from raising interest rates as it struggled to cope with rising inflation.
The Fed raised interest rates in March after inflation reached a 40-year high of 7.9%. It is meeting next week and is expected to raise interest rates again. Fed Chairman Jerome Powell has suggested that the central bank could raise interest rates by 0.5 percentage points, twice as much as in March.
The unexpectedly sharp 1.4% annual decline in GDP growth in the first quarter is unlikely to stop the Fed from raising interest rates by 50 basis points next week, as officials will attribute it to the temporary impact of Omicron and point to the strength of the main demand, “Ashworth wrote in a note to investors.
The surprising decline in growth comes as other sectors of the US economy remain strong. Employers have added an average of 600,000 new jobs a month in the last six months, and the unemployment rate fell to 3.6% in March, close to its pre-pandemic low.
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