The US economy contracted in the first quarter; The outlook is ambiguous as unsold goods pile up

  • First-quarter gross domestic product fell 1.6%.
  • lower growth in consumer spending; Stocks raised
  • Equipment business spending revised upward

WASHINGTON (Reuters) – The U.S. economy contracted a little more than expected in the first quarter as the trade deficit widened to a record and the spread of the novel coronavirus infection (Covid-19) curbed spending on services like entertainment.

The Commerce Department’s third estimate of GDP on Wednesday also showed some underlying softness in the economy, with consumer spending adjusting lower and inventories higher than reported last month.

This is a potential red flag for domestic demand and economic outlook amid recession fears as the Federal Reserve tightens monetary policy aggressively to tame inflation. Federal Reserve Chairman Jerome Powell said at a European Central Bank conference on Wednesday that there was “a risk” that the US central bank could slow the economy more than is necessary to control inflation. Read more

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“The biggest impact of this report is that it leaves inventories more overextended than previously thought, putting Q2 GDP in negative territory awaiting what tomorrow’s data reveals on May consumption, consumer inflation and April revisions to the same level,” Chris said. Lu, chief economist at FHN Financial in New York.

Gross domestic product fell at an annualized rate of 1.6% last quarter, after adjusting down from the 1.5% pace of decline reported last month. It was the first drop in GDP since the short and severe pandemic recession in nearly two years. Trade subtracted 3.23 percentage points, unadjusted, from GDP.

Economists polled by Reuters had expected the pace of deflation not to be revised by 1.5 percent.

It was initially estimated that the economy had contracted at a rate of 1.4%. It grew at a solid 6.9% pace in the fourth quarter. GDP was 2.7% higher than its level in the fourth quarter of 2019.

Consumer spending, which accounts for more than two-thirds of the economy, grew at a rate of 1.8% instead of the 3.1% pace reported last month. The rating downgrade reflected reviews made on the services, which are now estimated to have increased at a rate of 3.0% instead of the previous rate of 4.8%.

Spending on entertainment, financial services, insurance as well as health care has been reduced. Expenses on goods that were supposed to last three or more years rose 5.9%, down from the previously announced 6.8% rate. This reflected cuts in spending on cars and luxury goods.

Stocks on Wall Street were mostly lower. The dollar rose against a basket of currencies. US Treasury yields fell.

Stocks are piling up

The moderate spending rate caused inventories to rise significantly more than expected in May. Business inventories increased at a rate of $188.5 billion, instead of the $149.6 billion reported last month. The buildup was in the retail sector, especially in general merchandise stores.

Major retailers like Walmart (WMT.N) and Target (TGT.N) reported carrying a lot of merchandise.

The slower consumer spending was partially offset by increased investment in the equipment business, whose pace of growth picked up to 14.1% from 13.2%. As a result, growth in final sales to domestic private buyers, which excludes trade, inventories and government spending, fell to a 3.0% rate last quarter.

This measure of domestic demand was previously reported to have risen by 3.9%.

Revisions to corporate earnings were minor. The savings rate was not adjusted at 5.6%. The increase in personal income was little changed from the May estimate.

But the interest on assets has been reduced. This pushed up gross domestic income (GDI), an analytical measure of economic growth, narrowing to a rate of 1.8% from an estimated 2.1% pace last month. GDI advanced 6.3% in the fourth quarter.

The economy appears to have rebounded from recession in the first quarter, with consumer spending accelerating in April. Equipment trade spending remained strong through May, while the goods trade deficit narrowed dramatically as exports hit a record. But the bounce is losing momentum due to the aggressive stance of the Federal Reserve.

The US central bank this month raised its policy rate by three-quarters of a percentage point, its largest rise since 1994. The Fed has increased its policy rate by 150 basis points since March.

Retail sales fell in May, while building permits and new buildings fell. Consumer confidence hit a 16-month low in June. Thursday’s May consumer spending report may shed more light on growth expectations in the second quarter, which range from a low of 0.3% to a high of 2.9%.

“It is highly unlikely that the economy will be in a recession right now, despite lower first-quarter GDP and clear weakness in output growth in the current quarter,” said Scott Hoyt, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “Job growth remains strong, investment is growing, and households and businesses have strong balance sheets.”

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(Covering) Lucia Mutikani Editing by Nick Czyminski and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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