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U.S. Economic Activity Unexpectedly Contracts In First Quarter

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U.S. economic activity unexpectedly contracted in the first quarter of 2022, according to a report released by the Commerce Department on Thursday.

The report said real gross domestic product declined by 1.4 percent in the first quarter after spiking by 6.9 percent in the fourth quarter of 2021. The pullback surprised economists, who had expected GDP to increase by 1.1 percent.

The Commerce Department said the unexpected drop in GDP reflected decreases in private inventory investment, exports, and government spending along with an increase in imports, which are a subtraction in the calculation of GDP.

The decrease in private inventory investment was led by declines in wholesale trade and retail trade, while the slump in exports reflected widespread decreases in exports of non-durable goods

The report said the drop in federal government spending primarily reflected a decrease in defense spending on intermediate goods and services.

“Net trade represented a massive 3.2ppt drag on GDP growth amid a weakening global backdrop, while inventories imposed a 0.8ppt drag on GDP growth as supply chain challenges intensified,” said Lydia Boussour, Lead U.S. Economist at Oxford Economics.

Meanwhile, the unexpected decrease in GDP was partly offset by a 2.7 percent jump in consumer spending as well as increases in non-residential fixed investment and residential fixed investment.

The Commerce Department said the increase in consumer spending was led by a spike in spending on services that was partly offset by a decrease in spending on goods.

On the inflation front, the report showed the annual rate of growth in core consumer prices, which exclude food and energy, accelerated to 5.2 percent in the first quarter from 4.6 percent in the fourth quarter, reaching the highest level since 1983.

“The U.S. economy will face an increasingly challenging backdrop amid high inflation, intensifying supply chain bottlenecks, and tighter Fed and fiscal policy but we expect it will show resilience and grow 3.1% this year before slowing markedly to 2% in 2023 as the Fed’s tightening cycle take its toll,” said Boussour

She added, “But risks are tilted to the downside, and our yield curve models point to rising risk of a hard landing in 2023.”

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