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US economy contracted more than initially reported in Q1 as consumption dropped

The U.S. economy shrank at an annualized pace of 1.6% in the first quarter, reflecting a deeper contraction than previously reported.

The Bureau of Economic Analysis's third and final estimate of first-quarter GDP released Wednesday morning showed a 1.6% annualized drop in economic growth to start 2022, more than the 1.5% previously reported and which was expected by economists, according to estimates from Bloomberg.

Real gross domestic product (GDP) decreased at an annual rate of 1.6 percent in the first quarter of 2022, according to the
Real gross domestic product (GDP) decreased at an annual rate of 1.6 percent in the first quarter of 2022, according to the "third" estimate released by the Bureau of Economic Analysis. (U.S. Bureau of Economic Analysis)

Last quarter marked the first drop in GDP since the second quarter of 2020, the COVID-19 pandemic upended the global economy. In the fourth quarter of 2021, real GDP increased 6.9%.

"The update primarily reflects a downward revision to personal consumption expenditures (PCE) that was partly offset by an upward revision to private inventory investment," the BEA said in its press release.

Personal consumption expenditures rose 1.8%, compared to the previously reported 3.1% increase.

The GDP report serves as a backwards-looking overview of economic activity, capturing the January-through-March period. Still, the metric is an important indicator of the state of the U.S. economy, especially as predictions of a recession mount.

While the latest GDP report pointed to a slowdown in economic growth, the headline figure was skewed by a jump in the U.S. goods trade deficit amid severe supply chain disruptions driven by Russia's invasion of Ukraine.

Consumer spending, despite being downwardly revised, still rose at a modest rate despite decades-high inflation. The component represents about two-thirds of domestic activity.

The BEA pointed to a shift in spending on services, led by housing, utilities and "other" services, while within goods, consumers spent less on non-durable goods including groceries and gasoline and more on durable goods, led by motor vehicles and parts.

The BEA's advance estimate for second-quarter GDP due out July 28 may show a different picture as record-high prices begin to weigh on U.S. consumers.

"The economy is slowly sliding in the direction of weakness as consumers are buying less to keep GDP afloat," FWDBONDS Chief Economist Christopher Rupkey said in a note.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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