NEW YORK: The United States economy unexpectedly shrank last quarter, the first contraction since 2020, as a ballooning trade deficit and softer inventory growth belied an otherwise solid consumer and business demand picture.

       Gross domestic product (GDP) fell at a 1.4% annualised rate after a 6.9% pace of growth at the end of 2021, the Commerce Department’s preliminary estimate showed. The median forecast in a Bloomberg survey of economists was for a 1% increase.

       Together, net exports and inventories subtracted about 4 percentage points from headline growth. Government spending shrank, also weighing on GDP.

       Still, real final sales to domestic purchasers, a measure of underlying demand that strips out the trade and inventories components, increased an annualised 2.6%, an improvement from the 1.7% pace in the fourth quarter.

       On its face, the headline GDP figure was decidedly soft. But underlying details show still-solid household demand and business investment, corroborating comments about the economy from company executives during the current string of earnings calls.

       Against a backdrop of quicker inflation, the figures will likely keep Federal Reserve (Fed) monetary policy geared for a half-point hike in interest rates next week. Nonetheless, Fed officials need to balance that policy tightening with risks associated with building price pressures.

       Critics of President Joe Biden, whose poll numbers have sunk, may also seize on the GDP figures to indicate his policies aren’t working. Ten-year Treasury yields reversed an earlier decline, while stock futures and the dollar held onto gains.

       The Commerce Department’s data showed personal consumption, the biggest part of the economy, rose an annualised 2.7% in the first quarter, compared with 2.5% at the end of 2021.

       Services spending added 1.86 percentage points to GDP, while goods spending stagnated, reflecting changing consumer behaviour.

       At the start of this year, spending surged as Covid-19 cases declined. As the quarter dragged on, high inflation began to take a bite out of purchasing power.

       Nonetheless, many corporate executives on recent earnings calls touted the durability of the American consumer.

       Looking forward, rapid inflation and dwindling fiscal support point to more moderate growth in outlays for the remainder of the year. Furthermore, higher interest rates may at some point prompt companies to trim capital expenditures budgets.

       Other potential headwinds for the US economy include knock-on effects from Russia’s war in Ukraine that include deteriorating growth prospects in Europe, raw-materials shortages and persistent supply-chain hiccups.

       Trade flows are also at risk from the Chinese government’s severe pandemic-related lockdown measures that have stymied activity at some of the nation’s ports.

       “We remain very confident that the fundamental strength of consumer demand trends will remain intact over multiple years,” said Whirlpool Corp chief financial officer James Peters.

       “If anything, discretionary spending, especially from affluent consumers and credit cardholders, has been going up quite healthily. So in general, there isn’t any evident impact on inflation,” said Visa Inc CFO Vasant Prabhu. — Bloomberg