The US economy contracts in the first quarter; bleak outlook as unsold stock piles up

  • GDP in the first quarter fell by 1.6%
  • Consumer spending growth has slowed; lifted stocks
  • Business capital expenditure revised upwards

WASHINGTON, June 29 (Reuters) – The U.S. economy contracted slightly more than expected in the first quarter as the trade deficit widened to a record high and a resurgence in COVID-19 infections dampened government spending. services such as recreation.

The Commerce Department’s third estimate of gross domestic product on Wednesday also showed some underlying weakness in the economy, with consumer spending revised down and inventories higher than reported last month.

This is a potential wake-up call for domestic demand and the economic outlook amid a recession as the Federal Reserve aggressively tightens monetary policy to keep inflation in check. Fed Chairman Jerome Powell told a European Central Bank conference on Wednesday that “there is a risk” that the U.S. central bank will slow the economy more than necessary to control inflation. Read more

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“The biggest effect of this report is that it leaves inventories in a more overstretched position than previously thought, pushing second-quarter GDP into negative territory pending what tomorrow’s data reveals on consumer spending. May and consumer inflation and April revisions,” Chris said. Low, chief economist at FHN Financial in New York.

Gross domestic product fell at an annualized rate of 1.6% last quarter, revised down from the 1.5% pace of decline recorded last month. It was the first drop in GDP since the short, sharp pandemic recession nearly two years ago. Trade subtracted 3.23 unrevised percentage points from GDP.

Economists polled by Reuters had forecast that the pace of contraction would not be revised to a rate of 1.5%.

The economy was initially estimated to have contracted at a rate of 1.4%. It grew at a healthy pace of 6.9% in the fourth quarter. GDP was 2.7% above its level in the fourth quarter of 2019.

Consumer spending, which accounts for more than two-thirds of the economy, rose at a rate of 1.8% instead of the 3.1% pace recorded last month. The downward revision reflects revisions to services, which are now estimated to have grown at a rate of 3.0% instead of the previously reported 4.8% pace.

Spending on recreation, financial services and insurance, and health care have been scaled back. Spending on goods intended to last three years or more rose at a rate of 5.9%, down from the previously reported rate of 6.8%. This reflected downward revisions to spending on motor vehicles and leisure goods.

Stocks on Wall Street were mostly down. The dollar appreciated against a basket of currencies. US Treasury yields fell.


The moderate pace of spending left inventories significantly higher than expected in May. Business inventories rose at a rate of $188.5 billion, rather than the $149.6 billion pace recorded last month. The accumulation occurred in the retail sector, primarily in general merchandise stores.

Major retailers like Walmart (WMT.N) and Target (TGT.N) reported carrying too much merchandise.

The slowdown in consumer spending was partly offset by an increase in business investment in equipment, which grew from 13.2% to 14.1%. As a result, growth in final sales to domestic private buyers, which excludes trade, inventories and government spending, was reduced to a rate of 3.0% in the last quarter.

This measure of domestic demand would have previously increased at a rate of 3.9%.

Corporate earnings revisions were minor. The savings rate has not been revised to 5.6%. The increase in personal income was little changed from the May estimate.

But interest on assets has been reduced. That led to gross domestic income (GDI), another measure of economic growth, rising to a rate of 1.8% from the 2.1% pace estimated last month. GDI grew at a rate of 6.3% in the fourth quarter.

The economy appears to have rebounded from the first quarter slump as consumer spending accelerated in April. Business capital spending remained strong through May, while the goods trade deficit narrowed significantly as exports hit a record high. But the rebound is running out of steam due to the Fed’s aggressive stance.

The US central bank raised its key rate this month by three-quarters of a percentage point, its biggest hike since 1994. The Fed has raised its key overnight rate by 150 basis points since March.

Retail sales fell in May, while housing starts and building permits declined. Consumer confidence hit a 16-month low in June. May’s consumer spending report released Thursday could shed more light on the outlook for second-quarter growth, which ranges from as low as 0.3% to as high as 2.9%.

“However, it is extremely unlikely that the economy is in a recession right now, despite the drop in GDP in the first quarter and the apparent weakness in output growth in the current quarter,” said Scott Hoyt, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Job growth remains strong, investment is rising, households and businesses have strong balance sheets.”

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Reporting by Lucia Mutikani Editing by Nick Zieminski and Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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