Record trade deficit weighs on US economy in first quarter

THE US economy contracted in the first quarter amid a record trade deficit, the government confirmed on Wednesday (June 29), but that picture is misleading as domestic demand was strong.

Gross domestic product fell at a 1.6 per cent annualised rate last quarter, the government said in its third GDP estimate. That was revised down from the 1.5 per cent pace of decline reported last month. The economy grew at a robust 6.9 per cent pace in the fourth quarter.

Economists polled by Reuters had forecast the pace of contraction would be unrevised at a 1.5 per cent rate.

The decline in GDP last quarter also reflected a slower pace of inventory accumulation by businesses relative to the fourth quarter’s brisk rate due to supply-chain dislocations and worker shortages.

Final sales to private domestic purchasers, which exclude trade, inventories and government spending, increased at a 3.0 per cent rate last quarter. This measure of domestic demand was previously reported to have risen at a 3.9 per cent rate.

The economy appears to have rebounded from the first-quarter slump, with consumer spending accelerating in April.

Business spending on equipment remained solid through May, while the goods trade deficit narrowed significantly as exports hit a record high.

But the bounce is losing momentum as the Federal Reserve aggressively tightens monetary policy to combat inflation, heightening fears of a recession.

The US central bank this month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994. The Fed has increased its benchmark overnight interest rate by 150 basis points since March.

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Retail sales fell in May, while housing starts and building permits declined. Consumer confidence hit a 16-month low in June. REUTERS