The United States economy began the second quarter on shakier ground than previously thought. Consumer spending, the main engine of the economy, was much lower in the first quarter than previously reported. This could be a red flag for domestic demand and the economic outlook as the Federal Reserve aggressively tightens monetary policy to tame inflation. With the planned interest rate hike, the Fed mentions the risk that controlling inflation may cause the U.S. economy to slow down more than necessary.

According to the Department of Commerce, the third and final estimate showed that GDP fell by 1.6% on an annualized rate in the third quarter, which was revised down from a 1.5% drop reported last month. The widening of the trade deficit and a resurgence of Covid-19 infections reduced spending on services such as recreation, causing the economy to contract more than expected. The trade deficit subtracted 3.23% points from GDP. The current report also revealed some underlying economic weakness, with consumer spending revised lower and inventories higher than previously reported as consumers face high inflation and a monetary tightening phase. As a result, many economists have revised their second-quarter GDP forecasts in recent weeks. According to some estimates, the economy expanded moderately from April to June.

Consumer spending, which accounts for more than two-thirds of the economy, increased at a 1.8% annual rate rather than the 3.1% rate reported last month. The downgrade reflected revisions to services, which are now estimated to have grown at a 3.0% annual rate rather than the previously reported 4.8% rate. Recreation, financial services, and insurance, and healthcare spending have all been reduced. Outlays on goods expected to last three years or more rose at a 5.9% annual rate, down from the previously reported 6.8% rate. This reflected lower spending on motor vehicles and recreational goods. However, slower consumer spending was partially offset by increased business investment in equipment, which increased its growth rate to 14.1% from 13.2%. 

Because of the slow pace of spending in the first quarter, inventories are significantly higher than expected in May. Business inventories increased at a $188.5 billion rate, up from $149.6 billion in the previous month. The accumulation occurred primarily in the retail sector, primarily in general merchandise stores.

Want to read more? Download the report here.