August 9, 2022

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US GDP contracted by 1.4% in the first quarter of 2022

US GDP contracted by 1.4% in the first quarter of 2022
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The US economy unexpectedly contracted at an annual rate of 1.4 percent in the first three months of 2022 after more than a year of rapid growth, according to a Bureau of Economic Analysis report released Thursday. The new data is fueling fears about a recession amid persistent inflationary pressures and uncertainty over the war in Ukraine.

The slowdown – the first since the coronavirus recession in April 2020 – It marks a reversal from the tense pace that followed the rampant fiscal and monetary stimulus in the wake of the pandemic. Last year, for example, the US economy grew by 5.7 percent, the fastest full-year growth rate since 1984.

While most economists still think the expansion has a lot of momentum, especially given the strength of the labor market, recession fears are growing, with inflation showing few signs of abating. The weakness comes amid worrying signs that some of the world’s largest economies, including China and Europe, are heading to a standstill. For example, the International Monetary Fund lowered its estimates of global economic growth only last week.

“There are definitely clouds looming on the horizon,” said Kenneth Rogoff, Harvard economics professor and former chief economist at the International Monetary Fund. “You can’t read much into that number, but I have major concerns about the risks of recession, both in the US but also in Europe and China, and they may all reinforce each other like a perfect storm.”

Among the factors that led to the downturn in the economy at the beginning of 2022, the decline in purchases by retailers and the growing gap between US exports and imports. The Commerce Department reported this week that the country’s trade deficit in goods – the difference between incoming and outgoing products – widened to a record level in March.

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In addition, many companies bought less inventory than usual in early 2022, because they had merchandise left from late last year, when they stockpiled additional merchandise to protect against supply chain shortages and delays. Economists say this decrease in purchasing is likely to lead to an artificial decrease in GDP numbers.

“We have a resilient economy, but it’s starting to show signs of weakness,” said Diane Sonk, chief economist at Grant Thornton. “The truth is that higher prices and higher prices have consequences.”

still, Many parts of the economy remain strong. Employers have created more than 400,000 jobs for 11 consecutive months, sending the unemployment rate down to a new low and close to its lowest in several decades. And despite rising costs, families and businesses continue to spend and invest.

However, the downturn creates new complications for the Biden administration and Democratic lawmakers, who have so far pointed to a strong recovery as a sign that the country is on the right track.

President Biden doubled down on that message Thursday, saying the US economy “remains resilient.” He attributed the negative GDP reading to “technical factors” and called on Congress to draft legislation that would support US manufacturing.

“We need to continue to make progress — lower costs for working families, do more in America, and create well-paying jobs you can raise a middle-class family in,” Biden said in a statement.

Inflation is one of the biggest pressure points in the economy. Prices have gone up 8.5 percent last year, posing the primary challenge to the Biden administration and the Federal Reserve.

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Central Bank last month Interest rate hike started Hoping the economy slows enough to lower prices, Democrats are doing it Explore new policies They hope to tackle rising gas prices.

The Fed’s efforts have already begun to curb demand for some big ticket purchases. New home sales have fallen for three straight months, as higher interest rates deter potential homebuyers. Mortgage rates, which for years have been hovering around 3 percent, exceed 5 percent This month for the first time in more than a decade.

Chuck Wilson, co-owner of Boston Builders, a custom home builder in Westminster, Md. The demand for new homes has slowed significantly in recent weeks following the Federal Reserve’s decision. At the same time, he added, nearly every component of the building – including shingles, siding and wood – has become more expensive.

“Home buyers are going down, because interest rates are going up and prices are at their peak,” Wilson said. “I am finishing building a house now, but I do not have any new contracts signed. There is very little useful information.”

Economists say some form of slowdown was inevitable, given the rapid economic recovery in the past year. But they remain divided on whether the latest reading is a one-off slowdown or a sign that the economy is heading for the worse. Many still say they expect the economy to recover later this year, with GDP growth between 2.5 and 3 percent in 2023, despite the bumps along the way.

“When the Fed has to raise rates as much as they say, the risks of a recession are high,” said Mark Zandi, chief economist at Moody’s Analytics. “There is no great way for an economy plane to land on the tarmac. It might land without crashing, but it would be a scary flight.”

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