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The numbers: The first quarter is in the books: The economy shrank at a 1.6% annual pace, based on the final update. And the second quarter isn’t looking all that great, either.
The contraction in gross domestic product — the official scorecard for the economy — was the first since the onset of the pandemic in early 2020.
Previously the government put the decline at 1.5%.
The drop in the headline number was somewhat misleading, though. A record surge in the U.S. trade deficit was largely responsible for the decline in first-quarter GDP.
Consumer spending and business investment, the two biggest pillars of the economy, both rose in the first quarter and indicated the U.S. was still expanding at a modest pace.
Consumer spending wasn’t nearly as strong in the first quarter as it previously looked, though.
The situation in the second quarter could flip the script. GDP might have grown, but the details could be weaker.
Big picture: GDP in the second quarter is on track to grow less than 1%, according to the latest Wall Street estimates. Some forecasters put growth at as little as 0.1% but others see the economy expanding by 3%-plus.
The trade deficit has fallen from a record high and won’t be as big a drag. Yet businesses appears to have slowed the buildup in inventories and tempered investment. Consumer spending might have also softened again.
Regardless of where second-quarter GDP clocks in, the economy is likely to continue to slow. The Federal Reserve is jacking up interest rates to try to the quell the highest inflation in 40 years.
Higher borrowing costs typically slow the economy and sometimes even trigger recessions. An increasing number of forecasters predict a recession is likely by next year.
Key details: The biggest negative in the updated GDP report was a downward revision in consumer spending, the chief engine of the economy. That doesn’t bode well for the future.
Outlays rose a weaker 1.8% compared to the previously reported 3.1% increase. Consumers cut spending on goods such as clothes, home furnishings and food.
Yet business fixed investment, another main artery of the economy, was revised up slightly to show a 7.4% growth rate.
All figures are adjusted for inflation.
Most other figures in the report were little changed. Inflation rose at a 7.1% annual clip in the first quarter, and it’s accelerated since then.
Adjusted pretax corporate profits, meanwhile, fell at a 2.2% annual rate in the first three months of 2022. It was the first decline in more than a year.
The government revises GDP twice after the initial report and regularly revises growth figures years later.
Looking ahead: “The key takeaway though is that consumer spending was revised sharply lower, which indicates the economy carried less momentum than previously thought heading into the second quarter,” said Lydia Boussour, lead U.S. economist at Oxford Economics.
Market Reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
fell slightly in Wednesday trades.
