US economy posts surprise contraction, belying solid consumer picture

The US economy shrank for the first time since 2020, reflecting an import surge tied to robust consumer demand. 

While the surprise contraction adds to political headaches for President Joe Biden, it’s unlikely to dissuade the Federal Reserve from hiking interest rates aggressively to combat inflation.

Gross domestic product fell at a 1.4 per cent annualised rate in the first quarter following a 6.9 per cent pace at the end of last year, the Commerce Department’s preliminary estimate showed on Thursday. The median projection in a Bloomberg survey of economists called for a 1 per cent increase. 

The report is more an illustration of how GDP calculations tend to be volatile from quarter to quarter, not necessarily indicating weakness in the economy or a sign of recession. The contraction was due to a jump in imports and a drop in exports, coupled with a slower buildup of businesses’ stockpiles. On a year-over-year basis, the economy grew 3.6 per cent.

Together, trade and inventories subtracted about 4 percentage points from headline growth. Government spending shrank, also weighing on GDP. But real final sales to domestic purchasers, a measure of underlying demand that strips out the trade and inventories components, accelerated to a 2.6 per cent annualised rate.