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Economic Report: U.S. first-quarter GDP shrank 1.6%. The second quarter isn’t looking much better

The numbers: The first quarter is in the books: The economy shrank at a 1.6% annual pace, the government’s final appraisal shows. And the second quarter isn’t looking all that great, either.

The contraction in gross domestic product — the official scorecard for the economy — was the first since the onset of the pandemic in early 2020. Previously the government put the decline at 1.5%.

Yet the decline in the headline number was somewhat misleading. A record surge in the U.S. trade deficit was largely responsible for the drop in first-quarter GDP.

Consumer spending and business investment, the two biggest pillars of the economy, both rose in the first quarter and indicated the U.S. was still expanding at a modest pace.

The situation in the second quarter could flip the script. GDP might have grown, but the details could be weaker.

Big picture: GDP in the second quarter is on track to grow less than 1%, according to the latest Wall Street estimates. Some forecasters put growth at as little as 0.1% but others see the economy expanding by 3%-plus.

The trade deficit has fallen from a record high and won’t be as big a drag, but businesses appears to have slowed the buildup in inventories and tempered investment. Consumer spending might may have also softened a bit.

Regardless of where second-quarter GDP clocks in, the economic is likely to continue to slow. The Federal Reserve is jacking up interest rates to try to the quell the highest inflation in 40 years.

Higher borrowing costs typically slow the economy and sometimes even trigger recessions.

Key details: The biggest negative in the updated GDP report was a downward revision in consumer spending, the chief engine of the economy. Outlays rose a softer 1.8% compared to the previously reported 3.1% increase.

Household spending account for about 70% of U.S. economic activity.

Business fixed investment, another main artery of the economy, was revised up slightly to show a 7.4% growth rate.

Most other figures in the report were little changed. Inflation rose at a 7.1% annual clip in the first quarter and it’s accelerated since then.

Adjusted pretax corporate profits, meanwhile, fell at a 2.2% annual rate in the first three months of 2022. It was the first decline in more than a year.

The government revises GDP twice after the initial report and regularly revises growth figures years later.

Market Reaction: The Dow Jones Industrial Average
DJIA,
-1.56%

and S&P 500
SPX,
-2.01%

were set to open higher in Wednesday trades.

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