U.S. Economy Shrinks for the First Time Since Mid-2020

By Alice Seeley

On April 28, the Commerce Department reported that the U.S. gross domestic product annual rate fell by 1.4% in the first quarter of 2022, mainly due to disruptions in supply chain management. This is a sharp reversal from the 6.9% annual growth rate in the fourth quarter of 2021 and comes less than a week before the Federal Reserve is expected to accelerate its efforts to raise interest rates to curb inflation, which may further slow growth.

This is the weakest first quarter since spring 2020 when the COVID pandemic shutdowns drove the U.S. economy into a recession. The GDP report serves as a backward-looking overview of economic activity, capturing the January-through-March period. However, the metric is still an important indicator of the state of the U.S. economy at the start of this year. A recession is typically considered two consecutive quarters of negative GDP growth.

The GDP rate was below the 1% growth that economists had expected. This is “unsurprising,” stated Steve Rick, chief economist at CUNA Mutual Group.

“The U.S. economy remains very volatile with geopolitical turbulence from the war in Ukraine, a global supply chain crisis, increasing inflation, and the ongoing COVID-19 pandemic. All of these factors have shrunk GDP growth rates around the globe,” Rick explained.

Today’s drop in GDP is a wake-up call, said Chris Zaccarelli, chief investment officer for Charlotte-based Independent Advisor Alliance.

“The economy isn’t as strong as we all thought,” stated Zaccarelli. “It’s possible that GDP gets revised higher next month, as this is just the first release, and there will be two revisions, but it is a warning sign.”

However, other economists are optimistic despite the drop in GDP.

The “headline is misleading,” said Cliff Hodge, chief investment officer for Charlotte-based Cornerstone Wealth. “The shift to services spending bodes well for inflation moving forward, and core PCE (personal consumption expenditures) came in a bit light.”

Mark Hamrick, a senior economic analyst for Bankrate, agreed with Hodge that the drop in GDP is not as worrisome as “key drivers including consumer and business spending have been holding up.”