Even Worse: Economy Shrank 1.6% as Inflation Battered Consumers in First Quarter

President Joe Biden motions before boarding Air Force One at Kirtland Air Force Base after meeting with state and local officials on the New Mexico wildfires, Saturday, June 11, 2022, in Albuquerque, N.M. (AP Photo/Evan Vucci)
AP Photo/Evan Vucci

The U.S. economy shrank at a 1.6 percent annual pace, the government said Wednesday, as inflation weighed on consumer spending.

This is the government’s third and final estimate of the path the economy took in the first three months of the year. The government’s first estimate had the economy shrinking 1.4 percent and the second estimate was a contraction of 1.5 percent. This was the first time the economy registered a negative rate of growth since early in 2020 when the pandemic and lockdowns took hold.

Consumer spending—the chief engine of U.S. economic growth—was much weaker than previously thought, suggesting that inflation was already weighing down the economy and raising the risks of a recession. Consumer spending was revised down from an estimated 3.1 increase to smaller increase of 1.8 percent.

Data showed consumers cut spending on goods such as food, clothing, and home furniture after adjusting for inflation.

The trade deficit soared in the first quarter and was largely responsible for dragging GDP into negative territory.

Business fixed investment was revised up to show a 7.4 percent growth rate. This was driven by an increase in investment in equipment and intellectual property products.

Prices were rising at a 7.1 percent annual pace in the first quarter. The GDP estimate and its components are adjusted for inflation.

Pretax corporate profits declined at a 2.2 percent annual rate, undermining the argument made by many Democrats that inflation has been driven by expanding margins and corporate greed.

Economic growth does not appear to have rebounded by very much in the second quarter. The Atlanta Fed’s GDPNOW tracker indicates that data already released on the April through June quarter indicate growth of just 0.3 percent. The median estimate Wall Street economists has fallen below one percent growth for the second quarter, with a range from as low as 0.1 percent to as high as three percent.

Inflation has picked up in the second quarter but the trade deficit has fallen. Business investment in inventories, equipment, and intellectual property appears to have fallen. Several regional Federal Reserve banks have reported that surveys indicate a contraction in manufacturing. The Fed’s measure of industrial production showed the factory sector shrank in May. Consumer spending appears to have weakened as well.

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