U.S. Economy Shrinks In Q1 2022; Trade, Inventories Mask Underlying Strength

• The U.S. economy unexpectedly contracted in the first quarter amid a resurgence in COVID-19 cases and a drop in pandemic relief money from the government, but the decline in output is misleading as domestic demand remained strong. 
• GDP fell at a 1.4% annualized rate last quarter, the first decrease in GDP since the short and sharp pandemic recession nearly two years ago. As reported by the Commerce Department on Thursday, this was mostly driven by a wider trade deficit as imports surged, and a slowdown in the pace of inventory accumulation. 
• Front-loading by businesses fearful of shortages because of the Russia-Ukraine war contributed to a surge in imports. Exports tumbled, leading to a sharp widening of the trade deficit, which chopped 3.20 percentage points from GDP growth, the most since the third quarter of 2020. Trade has now been a drag on growth for seven straight quarters. Additionally, the economy also took a hit from supply-chain challenges, worker shortages and rampant inflation. 
• Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania noted that the U.S. economy is not anywhere close to recession. He noted that underlying demand remains strong, the labour market is in excellent shape, and that growth will resume in the second quarter.

(Source: Reuters)