US GDP Falls 1.4% As Economy Shrinks 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 first quarter was the weakest since spring 2020, when the Covid-19 pandemic and related shutdowns drove the US economy into a deep — albeit short — recession.

The drop 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.

Consumer spending, the economy’s main driver, rose at a 2.7% annual rate in the first quarter, a slight acceleration from last year. Businesses also poured more money into equipment and research and development, triggering a 9.2% rise in business spending.

“The most important aspects of the domestic economy have held up better than they did at the end of 2021, when growth was soaring,” said Diane Swonk, chief economist at Grant Thornton, in a note.

Two years after the pandemic struck, the US faces economic challenges, including supply disruptions, the Pandemic and Ukraine war, labor shortages and high inflation. Central bank officials lifted their benchmark rate in March by a quarterly percentage point to near zero inflation, and they have more than likely to sign.

Many economists think that the economy can withstand higher interest rates and return to modest growth in the second quarter and beyond.

Americans are spending more on services amid lower Covid-19 case totals and the 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.”

GDP growth and percentage-point contributions in select categories

Spending

on services

was a big

contributor.

Goods spending

(pct. pts.)

A buildup of

inventories

drove GDP

higher late

last year …

… but so far

this year

a slowdown

has weighed

growth on.

The trade

was deficit

also a drag

growth on.

Spending

on services

was a big

contributor.

Goods spending

(pct. pts.)

A buildup of

inventories

drove GDP

higher late

last year …

… but so far

this year

a slowdown

has weighed

growth on.

The trade

was deficit

also a drag

growth on.

Spending

on services

was a big

contributor.

Goods spending

(pct. pts.)

A buildup of

inventories

drove GDP

higher late

last year …

… but so far

this year

a slowdown

has weighed

growth on.

The trade

was deficit

also a drag

growth on.

Goods

spending

(pct. pts.)

A buildup of

inventories

drove GDP

higher late

last year …

… but so far

this year

a slowdown

has weighed

growth on.

The trade

deficit

was also

a drag on

growth.

Goods

spending

(pct. pts.)

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 — have been near historic lows and fell to 180,000 as of last week. Businesses are hiring and ramping up wages, supporting consumer spending.

High inflation, though, is cutting households’ purchasing power. 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 the price increase outpaced Cratex’s ability to recoup them through its own price increases.

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

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

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