The Commerce Department reported Thursday that gross domestic product declined at a 1.4% pace in the first quarter, marking an abrupt reversal for an economy coming off its best performance since 1984.
The negative growth rate missed the estimate of a 1% gain by a large margin. GDP measures the output of goods and services in the US.
Growth fell off a cliff after the 6.9% gain to close out last year due to a number of factors.
Inflation is at a level not seen since the early 1980s and the Russia invasion of Ukraine contributed to the economic stasis.
The price index for gross domestic purchases increased 7.8% in the three-month period, following a 7% gain in the fourth quarter of 2021.
The decline in growth was due to a decrease in private inventory investment. Government spending, as well as rising imports, were some of the restraints.
One-third of a percentage point off the final GDP reading was due to an 8.5% decline in defense spending.
Consumer spending held up fairly well for the quarter, rising 2.7% as inflation kept pressure on prices. The trade deficit shaved 3.2 percentage points off growth.
While recession expectations on Wall Street remain low, there is more trouble ahead for the economy as the Federal Reserve plans to hike rates to combat inflation. The personal consumption expenditures price index, a preferred inflation measure for the Fed, rose 5.2% in the quarter, well above the central bank's 2% inflation target.
The Fed's benchmark interest rate is expected to be about 2% by the end of the year, according to current market pricing. After two years of near-zero rates, that comes after a recovery from the deepest recession in U.S. history.
The Fed halted its monthly bond-buying program in order to keep rates low and money flowing through the economy. As soon as next month, the Fed will start to reduce its bond holdings slowly, eventually hitting as high as 95 billion a month.
Economists still expect the U.S. to avoid a recession, but the risks are rising.
There is a chance of negative growth a year from now. In a forecast that is an outlier on Wall Street,Deutsche Bank sees the chance of a significant recession hitting the economy in late 2023 and early 2024, the result of a Fed that will have tighten much more to tame inflation.
After a year in which GDP rose at a 5.7% pace, that's all that's left. In the first half of the year, consumer expenditures drove growth, but in the final two quarters of the year, an inventory rebuild from the PAIN levels accounted for most of the growth.
Sustaining that growth will require an easing of supply chains and some resolution in Ukraine, both of which will face pressures from higher interest rates from not just the Fed but also global central banks that are engaged in a similar struggle against inflation.
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