The US economy shrank unexpectedly at an annual rate of 1.4% in the first three months of 2022 after more than a year of rapid growth, according to a report by the Bureau of Economic Analysis released on Thursday. The new data spark concerns about a recession amid steady inflationary pressures and uncertainty over the war in Ukraine. The slowdown – the first since the Covid recession in April 2020 – marks a reversal from the horrific pace that followed a strong fiscal and monetary stimulus in the aftermath of the pandemic. Last year, for example, the US economy grew by 5.7 percent, the fastest clip in a year since 1984. While most economists still believe that the expansion is quite dynamic, especially given the strength of the labor market, fears of a recession have risen as inflation shows little sign of easing. The weakness comes amid worrying signs that some of the world’s largest economies, including China and Europe, are at a dead end. “There are definitely clouds on the horizon,” said Kenneth Rogoff, a professor of economics at Harvard University and a former chief economist at the International Monetary Fund. “You may not read too much in this issue, but I have major concerns about risk or recession, both in the US and in Europe and China, which are likely to reinforce each other like the perfect storm.” Among the factors driving the economy into early 2022 were declining inventory purchases by retailers and the growing gap between US exports and imports. The country’s trade deficit in goods – the gap between incoming and outgoing products – widened to a record high in March, the Commerce Department said this week. In addition, many companies bought fewer stocks than they would normally do in early 2022 because they had commodity residues from late last year, when they were supplied with extra goods to protect themselves from supply chain shortages and delays. This drop in markets is likely to artificially sweep away GDP figures, economists say. “We have a resilient economy, but the signs of weakness are beginning to show,” said Diane Swonk, chief economist at Grant Thornton. “The reality is that interest rate hikes and higher prices are having consequences.” Yet, many sectors of the economy remain robust. Employers have created more than 400,000 jobs for 11 consecutive months, driving the unemployment rate to a new pandemic low and close to a multi-decade low. And despite the higher costs, families and businesses continue to spend and invest. Even so, the shrinkage creates new complications for the Biden administration and Democratic lawmakers, who have so far pointed to the strong recovery as a sign that the country is on the right track. One of the biggest pressures on the economy is inflation. Prices have risen 8.5 percent in the past year, posing a crucial challenge for the Biden administration and the US Federal Reserve. The central bank last month began raising interest rates in hopes of slowing the economy long enough to mark prices, and Democrats are exploring new policies they hope could tackle high gas prices. The Fed is already trying to curb demand for some major ticket markets. New home sales fell for three consecutive months as rising interest rates discouraged would-be home buyers. Mortgage rates, which for years hovered around 3 percent, topped 5 percent this month for the first time in more than a decade. Chuck Wilson, co-owner of Boston Builders, a Westminster home builder, said demand for new homes had slowed sharply in recent weeks following the Fed’s decision. At the same time, almost every building block – including shingles, siding and timber – has become more expensive, he added. “Home buyers are falling because interest rates are going up and prices are going up,” Wilson said. “I’m finishing a house now, but I have not signed any new contracts. There is very little to report. “ Economists say some form of slowdown was inevitable, given the rapid economic recovery last year. However, they remain divided over whether the latest reading represents a one-time slowdown or a sign that the economy is taking a turn for the worse. Many still say they expect the economy to recover later this year, with Gross Domestic Product growing between 2.5 and 3 percent in 2023, despite increases along the way. “When the Fed has to raise interest rates as much as it says it does, the risks of a recession are high,” said Mark Zandi, chief economist at Moody’s Analytics. “There is no cute way for a cheap plane to land on asphalt. “It can land without crashing, but it will be a scary journey.”
