Major disappointment: the economy shrank 1.4% year on year in the first quarter

GDP contracted at an annualized rate of 1.4% in the first quarter, the Bureau of Economic Analysis reported Thursday morning, meaning the slowdown in trade added to the woes of high inflation.

The fall in GDP, which is adjusted for inflation, is a major reversal from the previous quarter, when growth soared to a rate of 6.9% as businesses began to recover faster of the pandemic. It is the first such contraction since the second quarter of 2020, when the economy suffered the massive shock of coronavirus shutdowns.

Friday’s report means President Joe Biden must now deal with poor GDP numbers, on top of soaring inflation that has strained households and lowered his approval rating. Inflation reached 8.5% in March, according to the consumer price index.

Still, the details of Thursday’s report showed that the underlying momentum is stronger than the headline figure suggests.

ANXIOUS FED SET FOR HISTORIC MEASURE TO TRY TO LIMIT INFLATION

“This contraction is seen as less worrying as it reflects a growing trade deficit and sharp inventory swings, as well as lower government spending,” said Mark Hamrick, senior economics analyst for Bankrate. “Key drivers, including consumer and business spending, held up.”

Consumer spending grew at a healthy 2.7% annual rate.

Rather, the decline in GDP was driven by factors unrelated to future growth. Specifically, much of the decline in the first quarter was due to a drop in exports and a sharp increase in imports, which subtracted the overall GDP figure. A drop in the number of companies buying inventory also reduced the overall GDP growth rate by about 0.8 percentage points.

A measure of economic growth in Friday’s report that excludes these factors, final sales to private domestic buyers, rose at a strong annual rate of 3.7%.

Other economic data suggests that the economy, for now, has some momentum despite some serious headwinds forming. Monthly job gains were strong. Jobless claims, seen as a high-frequency indicator of layoffs, have hit the lowest rates in decades.

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Overall, the outlook is for an economy that still has too much spending generating too much inflation. Friday’s report is unlikely to deter the Federal Reserve from taking historic steps to tighten monetary policy.

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