The slowdown — the first since the covid recession back in April 2020 — marks a reversal from the torrid pace that followed intense fiscal and monetary stimulus in the wake of the pandemic. Last year, for example, the US economy grew by 5.7 percent, the fastest full-year clip since 1984.
While most economists still believe the expansion has plenty of momentum, particularly given the strength of the job market, recession fears have rising been, as inflation shows little signs of easing. The weakness comes amid worrisome signs that some of the world’s largest economies, including China and Europe, are grinding to a standstill; for example the International Monetary Fund slashed estimates for global economic growth just last week.
“There are definitely clouds on the horizon,” said Kenneth Rogoff, an economics professor at Harvard University and former IMF chief economist. “You can’t read too much into this number, but I do have significant concerns about the risk of recession, both in the US and also in Europe and China, possibly all reinforcing each other like the perfect storm.”
Among the factors dragging down the economy at the beginning of 2022 were a reduction in retailers’ inventory purchases and a growing gap between US exports and imports. The country’s trade deficit for goods—the difference between incoming and outgoing products—widened to a record high in March, the Commerce Department reported this week.
In addition, many businesses bought less inventory than they normally would in early 2022, because they had leftover merchandise from late last year, when they stocked up on extra goods to guard against supply chain shortages and delays. That drop in purchasing is likely to artificially drag down GDP numbers, economists say.
“We’ve got a resilient economy but signs of weakness are starting to show,” said Diane Swonk, chief economist at Grant Thornton. “The reality is that rate hikes and higher prices have consequences.”
Still, many parts of the economy remain robust. Employers have created more than 400,000 jobs for 11 straight months, sending the unemployment rate to a new pandemic low and near a multi-decade low. And despite higher costs, families and businesses are continuing to spend and invest.
Even so, the contraction creates new complications for the Biden administration and Democratic lawmakers, who until now have pointed to the strong recovery as a sign that the country is on the right track.
President Biden doubled down on that message Thursday, saying the American economy “continues to be resilient.” He attributed the negative GDP reading to “technical factors” and called on Congress to draft legislation that would support US manufacturing.
“We need to keep making progress — cutting costs for working families, making more in America, and creating good-paying jobs you can raise a middle-class family on,” Biden said in a statement.
One of the economy’s biggest pressure points is inflation. Prices have risen 8.5 percent in the last year, posing the defining challenge for the Biden administration and Federal Reserve.
The central bank last month began raising interest rates in hopes of slowing the economy enough to corral prices, and Democrats are exploring new policies they hope could address high gas prices.
The Fed’s effort has already begun to curb demand for some big-ticket purchases. New-home sales have fallen for three months in a row, as rising interest rates deter would-be home buyers. Mortgage rates, which for years hovered around 3 percent, exceeded 5 percent this month for the first time in over a decade.
Chuck Wilson, co-owner of Boston Builders, a custom home builder in Westminster, Md., said demand for new homes has slowed markedly in recent weeks following the Fed’s decision. At the same time, just about every building component — including shingles, siding and lumber — has gotten costlier, he added.
“Home buyers are pulling back, because interest rates are going up and prices are through the roof,” Wilson said. “I’m finishing up a house now, but I don’t have any new contracts signed. There is very little good to report.”
Economists say some form of slowdown was inevitable, given the economy’s rapid recovery last year. But they remain divided over whether the latest reading represents a one-time deceleration or a sign that the economy is taking a turn for the worse. Many still say they expect the economy to bounce back later this year, with gross domestic product growing between 2.5 and 3 percent in 2023, despite bumps along the way.
“When the Fed has to raise interest rates as far as they say they’re going to, recession risks are high,” said Mark Zandi, chief economist at Moody’s Analytics. “There’s just no graceful way for the economic plane to land on the tarmac. It might land without crashing, but it’s going to be a scary ride.”