President Joe Biden’s upbeat message that the economy is cruising along hit a troublesome speed bump on Thursday when the federal government reported that U.S. gross domestic product shrank during the first three months of 2022.
Economic activity declined at an annual rate of 1.4%, a sharp reversal from last year when growth was the strongest since 1984.
There were technical reasons for the decline that likely obscured the actual health of the economy, yet the drop clearly put the president on the defensive after he has said repeatedly that the booming job market means the U.S. can withstand inflation at a 40-year high.
President Biden's $1.9 trillion coronavirus relief package was supposed to propel the economy to new heights that Democrats could then sell to voters in this year's midterm elections. But the muddled data has weakened the clarity of the president's pitch and emboldened Republican criticism.
The president told reporters at the White House that the consumer spending and business investment portions of the GDP report were solid, evidence that growth should resume in the months to come.
The biggest drag on GDP was an increase in imports, but a one-off glitch — a sharp drop in business inventories — was a key contributor to the overall drop. The inventory decline reflected the aftershocks of the pandemic, rather than the underlying health of the economy, the president said.
“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," President Biden said.
While he maintained that there would not be a recession this year, he conceded that it was a concern.
“You're always worried about a recession,” he said.
To Republican lawmakers and some economists, the drop in GDP hinted at the risk posed by surging inflation. Consumers have grown skittish despite increases in their net worth. Russia's invasion of Ukraine has created the risk of oil, natural gas, and food shortages. Pandemic-related lockdowns in China indicate that supplies chains troubles will persist.
Following last year's coronavirus relief package, the government is now trying to calm the economy. There is less fiscal support as the federal deficit will likely be lower this year. At the same time, the Federal Reserve is trying to raise benchmark interest rates to reduce inflation without causing a downturn.
But Thursday's report gave Republican lawmakers a direct line of attack.
“Under President Biden’s leadership, our economy is actually shrinking,” Texas Rep. Kevin Brady said at the start of a House Ways & Means Committee hearing on Thursday. “The president has missed four of the five quarterly economic projections. So Americans ought to brace for slower job growth and higher prices ahead.”
What the GDP report actually reveals about the months ahead may be more complicated. Some economists see consumer spending and business investment as signs of a quick rebound, while others fear that consumer spending could weaken because of high prices and the efforts to reduce inflation.
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