Revised Report Shows US Economy Shrunk More Than Previously Estimated in First Quarter 2022

A packet of U.S. five-dollar bills is inspected at the Bureau of Engraving and Printing in Washington on March 26, 2015. Gary Cameron/Reuters

The U.S. economy contracted by 1.5 percent in the first quarter of 2022, following an increase of 6.9 percent in the fourth quarter of 2021, due to a record trade deficit and 40-year high inflation, according to revised data released by the Bureau of Labor Statistics on May 26.

The contraction was revised down 0.1 percentage point from the “advance” estimate released in April 2022.

The update was driven by revisions to private inventory and residential investments, which were not as strong as initially reported, even as consumer spending was revised higher.

Adjusted pretax U.S. corporate profits in the first quarter fell for the first time since the second quarter of 2020 at a 2.3 percent rate, after a 0.7 percent spike in the last quarter of 2021, due to a resurgence of COVID-19 cases from the Omicron variant and a decline in government pandemic assistance payments.

The situation has been partially attributed to American consumers spending more on foreign imports, which overtook U.S. exports, along with less government spending and smaller business inventories.

There was also a slowdown in the restocking of goods in stores and warehouse inventories after a build up in the 2021 holiday shopping season.

Consumer spending in the revised report was raised to a solid 3.1 percent from an initial 2.7 percent, with household outlays accounting for about 70 percent of domestic economic activity.

Corporate profits remained strong with 12.5 percent growth on a year-over-year basis, as business investment, another pillar of the economy, was still robust.

The April 2022 Consumer Price Index, which measures the costs of goods and services including food, autos, gasoline, health care and rent, rose 8.3 percent from the same month a year ago.

Prices in April have jumped 0.3 percent since March, while the price index is expected to hit 4.7 percent by the end of 2022.

Economists predict that GDP will speed up and resume its growth in the second quarter to a 2 percent annual rate or slightly higher.

The Congressional Budget Office projects that GDP will grow 3.1 percent in 2022, through strong consumer spending and more demand for services.

The budget office expects growth to slow slightly over the next two years, with a forecast GDP of 2.2 percent in 2023 and 1.5 percent in 2024, and a prediction that inflation will remain at elevated levels in the near term.

Despite slowing growth and record-high inflation, employers have continued to add more than 400,000 jobs for 12 straight months, with the unemployment rate near a half-century low.

However, on a monthly basis, average hourly earnings dropped 0.1 percent in March, when accounting for the inflation spike, with real earnings tumbling 2.6 percent in April on a monthly basis.

The Federal Reserve raised the benchmark federal fund rate by 50 basis points on May 4 and has hinted at similarly sized rate hikes for the upcoming meetings in June and July.

The Fed is attempting to raise borrowing rates enough to slow down growth and inflation without causing a recession, Fox Business reported.

The central bank policymakers are attempting to raise interest rates quickly in order to bring consumer prices closer to their 2 percent goal.

Among economists surveyed by the National Association for Business Economics, more than half of respondents said they’re skeptical that the Fed can pull its strategy off, and they predicted a 25 percent chance that the U.S. economy will sink into recession within the year.

Most estimates show that the economy is still expanding at a solid pace, but growth has begun to slow since the Federal Reserve raised interest rates.