As US Economy Weathers Inflation, GDP Growth Turns Negative: Are We Headed For A Recession?

For the first time since the start of the COVID-19 pandemic in 2020, the Bureau of Economic Analysis has reported a decrease in real gross domestic product –— GDP. 

What Happened: The BEA released its third estimate Wednesday of the GDP net percentage change for the first quarter of 2022. 

The agency publishes three reports each quarter on the state of the economy to keep the public informed on changes to key indicators such as the GDP. 

The third and final estimate for the first quarter comes as the fiscal second quarter is set to end June 30. 

In the first estimate, the agency reported a negative 1.4% change of the GDP. The figure was updated to negative 1.5% change in the second estimate.

In the third estimate, the agency has reported a decrease of 1.6% to the GDP, citing lingering issues from the pandemic and surge of COVID due to the omicron variant.

How Inflation Is Driving GDP Contraction: The agency explains that the updated number is due to a downward revision to the personal consumption expenditures (PCE) index. The PCE index was created to indicate the prices paid by consumers for goods and services to reveal underlying inflation trends.

The agency writes, “In the first quarter, an increase in COVID-19 cases related to the omicron variant resulted in continued restrictions and disruptions in the operations of establishments in some parts of the country.”

The decrease in real GDP is due to decreases in exports, federal government spending, private inventory investment and state and local spending. 

The agency also shared that the decrease in exports reflects a widespread decrease in nondurable goods. This includes groceries, gasoline and other energy goods. There was also a loss of consumer spending in the first quarter which plays an impact on the GDP.

The news has impacted the SPDR S&P 500 EFT Trust SPY, which is falling for the second straight day this week.

Benzinga’s Take: This new calculation is yet another indicator that the U.S. economy could be heading into a recession.

The BEA reported a 6.9% increase in real GDP for the fourth quarter of 2021, which is a stark contrast to the decrease in the first quarter of 2022. 

Throughout all of 2022, the increase in inflation rates have kept breaking records, hitting 8.6% in May 2022. As inflation continues to rise, the cost of goods will become even higher making it harder for some families to afford the basic essentials such as groceries.
Related Link: Midyear Market Outlook: Where Is The Economy Headed From Here?

Photo: Courtesy of Hans Isaacson on Unsplash.