The US economy shrank slightly faster in the first quarter

By Anneken Tappe, CNN Business

America’s economy shrank in the first quarter of the year at a slightly faster rate than initially reported, the Bureau of Economic Analysis said Thursday.

US gross domestic product, the broadest measure of economic activity, decreased at an annualized rate of 1.5% between January and March, adjusted for seasonal swings, according to the second estimate of the data.

Some economists fear this could mean the nation might be headed for another recession, commonly defined as two quarters of declines in GDP.

Last month, the Commerce Department’s advance estimate of the data showed GDP had contracted at a rate of 1.4%. Economists had expected Thursday’s revisions to improve slightly, with a decline of 1.3%.

The update was driven by revisions to private inventory and residential investments, even as consumer spending was revised higher. However, higher imports to feed continued strong demand were a drag on GDP in the first months of the year.

Core inflation, measured through the price index tracking personal consumption expenditures minus food and energy costs, was revised down to 5.1% from 5.2% in the initial report.

Is a recession looming?

No matter the update, the message remains the same: The US economy witnessed a sharp slowdown in the first months of the year, compared with the 6.9% growth rate recorded in the fourth quarter of 2021. It also marked the worst quarter since the pandemic recession in the second quarter of 2020.

Inflation at a 40-year high, ongoing supply chain issues exacerbated by Covid lockdowns in Asia, and the war in Ukraine are all weighing on food and energy markets, hoisting red flags for the economic outlook.

US economic growth relies heavily on consumer spending. Economists and business leaders have worried for months that there will be a point at which prices have risen so high that consumers will start dramatically cutting back. And that would be very bad news for growth.

That said, a recession is no done deal either.

“The US economy remains strong approaching mid-year, but cracks are starting to appear in the foundation,” said Greg Daco, chief economist at EY-Parthenon. “We anticipate strong consumer spending activity and resilient business investment growth through the summer, but high inflation, rising interest rates and depressed financial markets will no doubt weigh on sentiment and demand as we approach year-end.”

In a new report, the nonpartisan Congressional Budget Office estimated that GDP will reach 3.1% in 2022, with elevated inflation persisting through the end of the year.

“In CBO’s projections, the current economic expansion continues, and economic output grows rapidly over the next year,” according to its latest government forecast, released Wednesday.

The Federal Reserve has embarked on a series of interest rate hikes as it tries to engineer a “soft landing” — tightening monetary policy from the accommodative stance it took during the height of the pandemic without pushing the economy off a cliff.

On Wednesday, minutes from the Fed’s early May policy meeting revealed that central bank officials expect solid GDP growth in the current, second quarter of the year, rather than another contraction.

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