US Q1 GDP Down 1.4% as COVID-19 Bites Amid Fewer Pandemic Payouts

WASHINGTON (Sputnik) - US Gross Domestic Product declined by 1.4% in the first quarter of this year as a resurgence in coronavirus cases and fewer pandemic relief payments slowed an economy that expanded almost 7% in the previous quarter, the Commerce Department said on Thursday.

"Real gross domestic product (GDP) decreased at an annual rate of 1.4 percent in the first quarter of 2022 " the Bureau of Economic Analysis, a unit within the Commerce Department, said in a preliminary estimate for the period.

The Commerce Department issues three GDP readings for each quarter.

Economists surveyed by US media had projected a 1% reading for the first quarter, after a 6.9% growth in the fourth quarter of 2021.

In a separate email, the Commerce Department cited the "resurgence of COVID-19 cases from the Omicron variant and decreases in government pandemic assistance payments" as likely reasons for the slowdown.

Inflation was also a possible factor, economists said.

"The US had the strongest annual growth in 2021 since 1984 but trade and inventories weighed in the first quarter," economist Adam Button said in a post on the ForexLive forum. "The 8.0% inflation number is certainly a problem."

After a 3.5% contraction in 2020 GDP forced by the coronavirus crisis, the US economy grew by 5.7% for all of 2021 — the biggest calendar-year growth since 1984.

But inflation has been expanding faster, with the Consumer Price Index growing 8.5% in the year to March, its most since 1981, after a 7.9% expansion in 2021, according to the Commerce Department.

The Federal Reserve is planning a series of aggressive rate hikes this year and next to bring inflation back to its annual target of 2% a year.

After slashing US interest rates to nearly zero at the height of the coronavirus outbreak, the central bank’s policy-making Federal Open Market Committee (FOMC) approved the first pandemic-era rate hike on March 16, raising rates by 25 basis points. That brought key lending rates to between 0.25% and 0.5%.

Many FOMC members have concluded since that the March hike was too tame to rein in inflation galloping at 40-year highs. They are pushing for "one to two" 50-basis point hikes in the near term to get a better grip on fighting inflation. Expectations are that the FOMC meeting on May 3-4 will agree on the first of such 50 bps hikes.

All in, the FOMC is considering as many as seven rate hikes this year and said monetary tightening will continue into 2023 if the inflation does not come down to desired levels.

But economists also caution that the economy could go into recession if rates rise too much, too fast. The last time the economy slipped into recession — which is technically defined as two straight quarters of negative growth — was in the aftermath of the 2020 COVID-19 outbreak. The risk is present again with the GDP decline in the first quarter.