US Economy Shrinks Unexpectedly, Amplifying Recession Fears

The U.S. economy contracted for the first time since the pandemic, a government report showed Thursday.

While analysts expected gross domestic product (GDP) to grow by 1% in the first quarter of 2022, it declined by 1.4% instead, according to the report released by the Bureau of Economic Analysis.

Because cryptocurrency prices have recently started to move in correlation with equity markets, a slowdown in economic growth, which might signal an upcoming recession, could affect digital assets including bitcoin (BTC).

Bitcoin and the broader cryptocurrency market didn’t move much after the report was released.

“The lack of an overreaction in markets reflects the underlying details of the report not being as bad as the headline suggests,” Danielle Booth, CEO of Quill Intelligence, a Dallas, Texas-based economic intelligence firm.

The key factors in the GDP decline were trade and inventories, whereas consumer spending and business investment remained strong – suggesting that the recovery from the pandemic remained solid.

'Closer to a decision'

Looking at the final quarter of 2021 and the first quarter of this year combined, the average economic growth is 2.8%, which is “still a respectable rate of economic growth," Ken Kim, U.S. senior economist at KPMG, wrote in a note.

“Today’s numbers suggest that we are likely closer to a recession than previously thought,” said Joe Haggenmiller, head of markets at XBTO, a crypto finance firm. “It therefore stands to reason that if negative growth persists, the equity markets may suffer and bitcoin may as well because of its positive correlation.”

Many economists aren’t worried about the latest numbers because while headline GDP was negative, the underlying components, such as consumption, fixed investment and demand, remained strong. The commonly used definition of a recession is a decline in economic activity over two consecutive quarters, so it remains to be seen if this first quarter of the year is worrisome or not.

Some major banks, including Deutsche Bank and Bank of America, say the U.S. economy could fall into a recession as soon as 2023.

“Momentum headed into the second quarter is not robust enough to suggest this negative print was a 'one and done,'” Booth said.