U.S. economy contracts in Q1; outlook murky as unsold goods accumulate
By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. economy contracted slightly more than previously estimated in the first quarter as the trade deficit widened to a record high and a resurgence in COVID-19 infections curbed spending on services like recreation.
The Commerce Department's third estimate of gross domestic product on Wednesday also showed some underlying softness in the economy, with consumer spending revised lower and inventories higher than reported last month.
This is a potential red flag for domestic demand and the economic outlook amid recession jitters as the Federal Reserve aggressively tightens monetary policy to tame inflation. Fed Chair Jerome Powell told a European Central Bank conference on Wednesday that "there is a risk" the U.S. central bank could slow the economy more than needed to control inflation.
"The biggest effect from this report is that it leaves inventories in a more overbuilt position than previously thought, putting second-quarter GDP into negative territory pending what tomorrow's data reveal about May consumption and consumer inflation and April revisions to the same," said Chris Low, chief economist at FHN Financial in New York.
Gross domestic product fell at a 1.6% annualized rate last quarter, revised down from the 1.5% pace of decline reported last month. That was the first drop in GDP since the short and sharp pandemic recession nearly two years ago. Trade subtracted an unrevised 3.23 percentage points from GDP.
Economists polled by Reuters had forecast the pace of contraction would be unrevised at a 1.5% rate.
The economy was initially estimated to have contracted at a 1.4% rate. It grew at a robust 6.9% pace in the fourth quarter. GDP was 2.7% above its level in the fourth quarter of 2019.
Consumer spending, which accounts for more than two-thirds of the economy, grew at a 1.8% rate instead of the 3.1% pace reported last month. The downgrade reflected revisions to services, now estimated to have increased at a 3.0% rate instead of the previously reported 4.8% pace.
Spending on recreation, financial services and insurance as well as healthcare was downgraded. Outlays on goods meant to last three years or more increased at a 5.9% pace, slashed from the previously reported 6.8% rate. That reflected downgrades to motor vehicles and recreational goods spending.
Stocks on Wall Street were mostly lower. The dollar rose against a basket of currencies. U.S. Treasury yields fell.
GDP consumer spending https://graphics.reuters.com/USA-STOCKS/klpykrlyjpg/gdpconsumer.png