The US economy shrank 1.5% in the latest quarter in its worst result since the Covid recession, a new GDP estimate shows

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The economy posted its worst annualized performance last quarter since the pandemic-driven recession in 2020, the government said in an updated press release on Thursday, blaming the omicron variant of Covid-19 and reduced government support for an unexpected contraction responsible for economic activity.

Important facts

The U.S. economy shrank at a 1.5% annual rate in the first quarter of 2022 — the first contraction since the second quarter of 2020, the Bureau of Economic Analysis estimated on Wednesday in a worse-than-expected update of last month’s numbers that showed a drop of 1.4%.

The update primarily reflected lower-than-expected spending on business inventories and housing investment, only partially offset by an increase in consumer spending, the government said.

In the first quarter, a record wave of Covid-19 cases fueled by the Omicron variant led to ongoing restrictions and business disruptions, while government aid programs, including eligible loans to businesses and household benefits, lapsed or expired — fueling growth, according to it further prevented for release.

Broad declines in exports, government spending and corporate inventories, along with increased imports, drove the overall contraction, the government said.

On an annualized basis, consumer spending rose 3.1% in the first three months of the year, the highest rate since the second quarter of 2021, the government said, while business investment rose 6.8%.

The overall decline stands in stark contrast to the economy’s better-than-expected 6.9% growth in the fourth quarter, the fastest rate in nearly 40 years, due in part to a surge in exports and increased inventory investment by auto dealers.

Crucial quote

In an email following last month’s initial report, which came in significantly worse than expectations for 1% growth, Bankrate analyst Mark Hamrick said the estimate served as a reminder of the “volatile and complicated times we are in living”, but that the decline is “less worrying” as key drivers of economic growth, such as consumer and business spending, have held up despite the widening trade deficit and large swings in corporate inventories.

main critic

“We continue to expect a solid recovery in growth in the second quarter, but our initial hopes of a print above 5% have faded somewhat,” Pantheon Macro’s chief economist Ian Shepherdson said in a note following Thursday’s release, adding, that a more accurate reading at 4% now seems more likely.

key background

Although the economy rebounded quickly from the 2020 Covid recession, the Federal Reserve’s rollback of pandemic stimulus measures, Russia’s invasion of Ukraine and ongoing Covid restrictions have added to market uncertainty this year. Last quarter, the stock market posted its worst result since the market crash in early 2020, with the S&P down 5% and the tech-heavy Nasdaq down 9%. “Recession risks are high — uncomfortably high — and rising,” said Mark Zandi, chief economist at Moody’s Analytics, in a weekend note. “For the economy to pull through without suffering a downturn, we need very clever Fed policy and a bit of luck.”

Further reading

Stocks continue to fall as a growing number of Wall Street pundits warn of rising recession risks (Forbes)

Big bank first to predict recession – others could follow (Forbes)

This recession indicator is flashing warning signs as the Fed, war and oil threaten economic recovery (Forbes)

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