President Biden’s push to sell Americans on his economic record just became more complicated.
Federal data released Thursday showed the U.S. economy contracted for the first time since 2020 during the first three months of the year despite many other measures of economic activity remaining strong.
U.S. gross domestic product (GDP) fell at a yearly pace of 1.4 percent during the first quarter, the Bureau of Economic Analysis said Thursday, marking the first economic contraction since 2020. A spike in imports and a decline in exports subtracted enough from GDP to push growth in reverse.
“The headline GDP figure is not really a good representation of what’s going on under the hood,” said Andrew Hunter, senior economist at research firm Capital Economics, in a Thursday interview.
“The reason growth was actually negative was almost entirely due to a surge in imports,” which the Bureau of Economic Analysis subtracts from GDP figures, he explained, “and that partly reflects the strength of domestic demand.”
High inflation, supply chain issues and labor shortages had already taken a serious toll on Biden’s approval ratings before the GDP report, even after the U.S. economy added a record 6.4 million jobs and grew 5.7 percent during his first year in office.
And as inflation hits four-decade highs, a growing number of voters have turned on Biden’s handling of the economy, according to recent polling.
The drop in economic growth also opened another line of attack for Republicans as they attempt to ride economic dissatisfaction to majorities in the House and Senate.
“Accelerating inflation, a worker crisis, and the growing risk of a significant recession are the signature economic failures of the Biden Administration — and will likely get worse,” said Rep. Kevin Brady (R-Texas), ranking member on the House Ways and Means Committee, in a Thursday statement.
“This is what happens when a President treasures his unpopular socialist agenda over the needs of American workers, families, and Main Street businesses.”
While negative GDP growth is often a sign of a brewing recession, overall economic activity still held up well in the start of the year.
Personal consumption expenditures, a measure of consumer spending, rose at an annualized rate of 2.7 percent in the first quarter. Consumer spending on services rose 4.3 percent and spending on goods rose 4.1 percent annualized, even as consumer prices rose 7 percent over the past year.
Businesses also ramped up spending and investment, a positive sign for longer-term growth and job gains. Private domestic investment, a sign of businesses expanding their operations, rose 2.3 percent, with a massive 15.3 percent increase in spending on equipment.
And final sales of U.S.-made goods within the country rose at an annualized rate of 2.6 percent.
“Beneath the weak headline print, the details of the report point to an economy with solid underlying strength and that demonstrated resilience in the face of Omicron, lingering supply constraints and high inflation,” wrote Lydia Boussour of Oxford Economics in a Thursday analysis.
Biden sought to highlight the strong points of the GDP report along with other signs of steady economic recovery under his watch. The U.S. gained 1.7 million jobs over the first three months of 2022 — even as GDP shrunk — amid record-breaking demand for workers and resilient consumer spending. The unemployment rate also dropped to 3.6 percent in March, falling within 0.1 percentage points of the pre-pandemic level.
“I think what you’re seeing is enormous growth in the country that was affected by everything from COVID and the COVID blockages that occurred along the way,” Biden said Thursday when asked if he was concerned about a recession.
White House press secretary Jen Psaki also attributed some of the decline in GDP to how much stronger the U.S. economy is than many global counterparts.
“The number was down but that is largely because our economy is doing better than many economies around the world. So, while we were purchasing a lot of goods from other countries, there wasn’t the same capacity to purchase our goods,” Psaki said at a Thursday press briefing.
Economists largely agree that U.S. consumer demand is far above what the global economy can handle. Inflation has run well above the Federal Reserve’s target of 2 percent annual price growth due to a combination of fiscal stimulus from both the Trump and Biden administrations, the Fed’s ultralow interest rates and wave after wave of pandemic-driven supply snarls.
The steady demand from consumers and businesses should help keep the economy out of recession through the balance of 2021. Even the economists most concerned about a potential recession don’t see one on the horizon until 2023 and do not believe it will be anywhere close to as bad as the coronavirus downturn or the aftermath of the Great Financial Crisis in 2008.
But as the Fed rushes to raise interest rates fast enough to curb inflation, Biden must sell a recovery with diminishing benefits for voters.
“There is definitely good reason to expect perhaps a slightly more pronounced slowdown in this year,” Hunter said.