US Economy Contracts By 1.4% In Weakest Performance Since Start Of Pandemic

The U.S. economy experienced its sharpest contraction in gross domestic product (GDP) since the start of the COVID-19 pandemic after growth declined by 1.4%.

On Thursday, the U.S. Commerce Department reported that the economy stumbled out of its first quarter after posting a far stronger 6.9% annual growth in the fourth quarter of 2021. This decline was worse than the meek growth projections of 1% expected by forecasters.

The first quarter was full of turbulence that wracked the economy from its very beginning. At the start of the quarter, the uncertainty surrounding the Omicron variant of COVID-19 was driving down economic activity. After the initial outbreaks were contained, the U.S. economy has continued to hum along despite the persistence of the Omicron “stealth” sub-variant.

But a trifecta soon emerged with the war in Ukraine, a more hawkish Federal Reserve hiking interest rates, and the continuing rise in inflation.

Russia’s decision to attack Ukraine on Feb. 24 threw a wrench into supply chains for a basket of goods, but the war has driven energy prices up sharply. According to the American Automobile Association (AAA), the price of a gallon of gas now stands at $4.14, but in some states it is close to or over $5.

Further away, COVID-19-related lockdowns in China have only added to supply chain disruptions as massive manufacturing hubs like Shanghai remain shut down by Chinese authorities. At the same time, the U.S. trade deficit has ballooned as Americans continue to import more than they are exporting.

Taken together, the confluence of events has driven up inflation to levels not seen in decades. Last month, the Consumer Price Index (CPI) was recorded at 8.5%, the highest level since 1982. Wholesale inflation hit 11.2%, driven primarily by spiking food and energy prices.

The underlying fundamentals of the economy remain solid with consumer spending still continuing to grow alongside fixed and residential investment. However, this can all become challenged as the Federal Reserve begins to more aggressively combat inflation with larger interest rate hikes.

Last month, the central bank launched a rate hike of a quarter of a percentage point for the first time in three years with more rate increases expected in the coming months. Minutes from a recent meeting of Fed officials also suggest it will proceed with a larger rate hike at their next meeting in May.