© Reuters.

By Geoffrey Smith 

Investing.com — The specter of stagflation in the U.S. reared its ugly head on Thursday as new data suggested that the economy contracted in the first quarter.

shrunk at an annualized rate of 1.4% in the three months through March, down from 6.9% in the fourth quarter, and a much more negative first reading than had been expected. Consensus forecasts had been for growth of 1.1%.

Analysts argued that the headline figure was misleadingly weak, being dominated by a big negative contribution from external trade – the trade deficit widened to over $270 billion in the first quarter –  and a drop in inventories.

However, was also much weaker than expected. It rose by an annualized 2.7% instead of the 3.5% expected, against a backdrop of inflation running at a 40-year high.

The numbers leave U.S. GDP some 0.4% below its pre-pandemic level and 2.1% below where it would have been if the pandemic hadn’t happened, according to Oxford Economics’ Greg Daco. He said the outlook was nonetheless better than the headline figure suggests.

“No this isn’t the onset of a recession,” Daco said via Twitter, pointing to the fact that GDP was still up 3.6% from a year earlier.

A contraction would also be at odds with many individual data series over the period. Business surveys by the regional Federal Reserve banks and private sector companies such as S&P Global have routinely shown activity at a robust level, while the labor market added over 1.6 million nonfarm jobs in the quarter.

Additionally, most recent GDP data have tended to be revised higher, as the government’s method for compiling them doesn’t completely reflect the change in working trends triggered by the pandemic.

However, the data do provide some evidence of the highest inflation in a generation sapping growth, as the start of a long tightening of monetary policy by the Federal Reserve looms.

Business investment grew at an annualized rate of 7.3% in the quarter, accelerating from 2.5% in the previous three months. That alone added 1.2 points to GDP.

Prices for core personal consumer expenditures, the Fed’s preferred measure of inflation, rose at an annual rate of 7.0% in the first quarter.

Financial markets appeared unable to decide what to make of the numbers. The and were both largely unchanged from before the release by 9:05 AM ET (1305 GMT).

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