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The Line: U.S. Economy Shrinks in First Quarter of 2022

Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.

Gross domestic product—the value of goods and services produced in the U.S.—shrank at a 1.4% annual pace in the first quarter, its first contraction since the second quarter of 2020. Economists expected GDP to increase at a 1% pace, so this is bad news, although maybe not as bad as you’d think.

Let’s start with the negative. After its best year of growth since 1984, the U.S. economy started off 2022 poorly, posting negative growth for the first time since the start of the COVID-19 pandemic. With the Federal Reserve aggressively raising rates to bring down inflation, one couldn’t be blamed for worrying about what might happen to economic growth in the next few quarters.

That’s enough bad news for a Friday morning. Let’s look at why this isn’t the end of the world.

The number one reason is consumers are still spending. Personal consumption expenditures rose at a 2.7% annual pace in the first quarter, the fastest pace since 2Q21. The decline in GDP in the first quarter was due to slower inventory investment, a 2.7% decline in government spending, and a widening trade deficit that subtracted 3.2% from first-quarter growth.

Consumers should keep spending in the months to come, as payrolls have risen by over 400,000 in each of the past 11 months. The unemployment rate has fallen to 3.6%, more people are re-entering the workforce, and there are still 11 million unfilled jobs out there. We’ve also seen continuing unemployment claims fall to their lowest level in over 50 years.

Even the economists—who are not known for their optimism—believe this slowdown will be temporary. Economists surveyed by the Wall Street Journal expect GDP to bounce back in the second quarter and rise 2.6% this year. That would be the same annual growth posted in 2019.

Inflation remains the number one issue facing the economy, but so far it hasn’t stopped consumers from spending. If the Fed can bring inflation down without causing a recession—which they believe they will do—economic growth can surge again as the labor market remains as strong as it’s ever been.

So, first quarter GDP was disappointing, but the future is still looking good.

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