US economy slipped 1.6% to start year; return to growth eyed

The U.S. economy shrank at a 1.6% annual pace in the first three months of the year, the government reported Wednesday in a slight downgrade from its previous estimate for January-March quarter.

It was the first drop in gross domestic product — the broadest measure of economic output — since the second quarter of 2020, in the depths of the COVID-19 recession, and followed a strong 6.9% expansion in the final three months of 2021. Inflation is running at 40-year highs, and consumer confidence is sinking.

Last month, the Commerce Department had pegged first-quarter GDP growth at 1.5%. But on its third and final estimate Wednesday the department said consumer spending — which accounts for about two-thirds of economic output — was substantially weaker than it had calculated earlier, growing at a 1.8% annual pace instead of the 3.1% it estimated in May.

That was partly offset by a revision to its calculation of business inventories. Commerce said that reduced restocking of company shelves had shaved less than 0.4 percentage points from first-quarter growth, down from the 1.1 percentage point hit it estimated in May.

Still, the negative GDP number probably doesn't signal the start of a recession, and economists expect growth to resume later this year.

The first-quarter dip doesn't say much about the underlying health of the economy: A bigger trade deficit — reflecting Americans' appetite for foreign goods and services — slashed 3.2 percentage points off the change in January-March GDP.