US GDP Drops 1.4% as Economy Shrinks for First Time Since Pandemic

US gross domestic product shrank at a 1.4% annual rate as the first quarter weighs on supply disruptions, though solid consumer and business spending growth is likely to resume.

The decline in US gross domestic product marked a sharp reversal from a 6.9% annual growth rate in the fourth quarter, the Commerce Department said. The drop also marked the weakest quarter since spring 2020, when the Covid-19 pandemic and related shutdowns drove the US economy into a deep — albeit short — recession.

The drop in GDP stemmed from a widening trade deficit, with the US importing far more than it exports. A slower pace of inventory investment by businesses in the first quarter — compared with a rapid buildup of inventories at the end of the year — also pushed growth lower. In addition, the GDP on pandemic weighed on fading government stimulus spending.

Despite the slip, many economists think that overall economies of scale will continue to rise in the second quarter and beyond, as consumers and businesses continue to spend. Consumer spending, the economy’s main driver, rose at a 2.7% annual rate in the first quarter, a slight acceleration from last year.

“It’s really hard for the economy to grow once you’ve recovered,” said David Berson, chief economist for Nationwide Mutual Insurance Co.

Also weighing on growth are rising interest rates as the Federal Reserve combats inflation. Central bank officials lifted their benchmark rate in March by a quarterly percentage point to near zero, and they have more than likely to follow suit.

Looking ahead, economists surveyed by The Wall Street Journal estimate GDP rising 2.6% in the fourth quarter of 2022, matching 2019 annual growth, but logging well below 5.5% growth last year.

The labor market is a key source of economic strength right now. Jobless Claims — A Proxy for Layoffs — Are Employers Clinging to Employees at a Historically Low Level Businesses are hiring and ramping up wages, supporting consumer spending, and the economy’s main driver.

High inflation is the households’ purchasing power into cutting. Consumer prices rose 8.5% in March from a year earlier, a four-decade high. Elevated inflation is a wiping-away pay gain for many workers: average hourly earnings were up 5.6% over the same period.

Fast-rising prices are also challenging many businesses.

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Cratex Manufacturing Co., a 100-person manufacturer, manufactures and sells industrial abrasives to other manufacturers of steel mills, jet-engine blades and metal castings. The San Diego-based company has seen prices for materials it buys — such as resin and rubber — rise between 5% and 30% last fall, said Ricker McCasland, president of Cratex.

At the same time, Cratex has had ramp-up wages to retain workers.

“It’s a race to stay ahead of all those rising costs,” McCasland said. He added that the raw materials for increased price outpaced Cratex’s ability to recoup them through its own price increases.

While recognizing the rising risk of a downturn, most economists surveyed in the Journal said they still think the Fed could trigger a recession without inflation. The economy is positioned with high interest rates, record lows near unemployment, steadily rising incomes and subdued levels of consumer debt, they say.

Still, the central bank has never had a lowered inflation as much as it has set out to do without a recession. Fed officials say they can curb employer demand for workers without layoffs, and a recession without tamp down inflation.

Airlines, gas stations and retailers use complex algorithms to adjust their prices in response to cost, demand and competition. WSJ’s Charity Scott is what dynamic pricing is and why companies are using it more often. Illustration: Adele Morgan

Although Americans are big-ticket items of cutting back purchases, they are spending more on services such as lower Covid-19 case totals and lifting of remaining pandemic restrictions. Travel is one key example: hotel occupancy rates are up from January, and more people are also boarding planes.

George Lewis, co-owner of the Brass Lantern Inn in Stowe, Vt., Is in demand for a surgeon. Visits to his bed-and-breakfast on Maple Street are some of the strongest rooms out there this summer, with a sharp shift from a pandemic to a small-business help to survive.

“People have called up: ‘Are you really sold out?’ “Mr. Lewis said. “I’m like, ‘Yeah, yeah, we’re really sold out.’ ”

Still, Mr. Lewis is more concerned about business next year. For one, it’s clear where the inflation will be, he said. Prices have already risen briskly for heating oil to warm rooms, as well as for the cheddar cheese Mr. Lewis uses egg strata, a breakfast casserole he serves up on Saturdays.

Consumer spending is another wild card, he added.

“We don’t know what people’s pocketbooks can accommodate this year,” he said. “Some people are spending… what’s the cost of independent.”

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

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