U.S. Economy Posts Surprise Contraction With Trade Gap Surging

The U.S. economy unexpectedly shrank last quarter, the first contraction since 2020, as a ballooning trade deficit and softer inventory growth belied an otherwise solid consumer and business demand picture.

Gross domestic product fell at a 1.4% annualized rate after a 6.9% pace of growth at the end of 2021, the Commerce Department’s preliminary estimate showed Thursday. The median forecast in a Bloomberg survey of economists was for a 1% increase.

Together, net exports and inventories subtracted about 4 percentage points from headline growth. Government spending shrank, also weighing on GDP. Still, real final sales to domestic purchasers, a measure of underlying demand that strips out the trade and inventories components of GDP, increased an annualized 2.6%, an improvement from the 1.7% pace in the fourth quarter.

On its face, the headline GDP figure was decidedly soft. But underlying details show still-solid household demand and business investment, corroborating comments about the economy from company executives during the current string of earnings calls.

Against a backdrop of quicker inflation, the figures will likely keep Federal Reserve monetary policy geared for a half-point hike in interest rates next week. Nonetheless, Fed officials need to balance that policy tightening with risks associated with building price pressures.