The US economy contracted in the first quarter; Trade, inventory mask underlying energy

WASHINGTON – The U.S. economy contracted unexpectedly in the first quarter amid a resurgence of the Coronavirus Disease 2019 (COVID-19) case and a reduction in epidemic relief money from the government, but output declines are misleading as domestic demand remains strong.

The first decline in gross domestic product since the brief and sharp epidemic recession nearly two years ago, reported by the Commerce Department on Thursday, was largely driven by a widening trade deficit and a slowdown in inventory savings due to rising imports.

A measure of domestic demand has accelerated from the fourth quarter rate, which eliminates the risk of stability or recession. The Federal Reserve is expected to raise interest rates by 50 basis points next Wednesday. The US Federal Reserve raised its policy interest rate by 25 basis points in March and is likely to start cutting its asset holdings soon.

“The economy is still showing some resilience, but the first-quarter GDP report indicates the onset of more moderate growth this year and later, mainly in response to higher interest rates,” said Sal Gutierrez, a senior economist at BMO Capital Markets in Toronto. . “Despite the contraction, the Fed has little choice but to aggressively increase inflation in May.”

Gross domestic product (GDP) fell 1.4% year-on-year in the last quarter, the government said in its advance GDP estimates. The economy grew at a strong 6.9% pace in the fourth quarter. Economists surveyed by Reuters have forecast GDP growth of 1.1%. Estimates range from a 1.4% contraction rate to a 2.6% growth rate.

The economy has also been hit by supply-chain challenges, labor shortages and massive inflation. The fall of the last quarter is a head net because in the fourth quarter of 2019 the GDP remained 2.8% above its level and the economy grew by 3.6% year on year. In addition, 1.7 million jobs were created in the first quarter, and production output grew at a rate of 5%.

“It’s nonsense that real GDP has fallen,” said Conrad Dicodros, a senior economic adviser at New York’s Brain Capital.

But discrepancies indicate poor productivity in the last quarter.

Front-loading by traders contributed to the increase in imports due to fears of deficit due to the Russia-Ukraine war. Exports declined, causing the trade deficit to widen sharply, cutting GDP growth by 3.20 percentage points, the most since the third quarter of 2020. Trade has now pulled on growth for seven consecutive quarters.

As local producers do not have the capacity to increase production, businesses are turning to imports to meet demand. Business inventory grew at a slower pace of $ 158.7 billion, from $ 193.2 billion in the October-December quarter. Inventory investment fell 0.84 percentage points from GDP growth.

Stocks were higher on Wall Street as investors stopped dropping GDP. The dollar has risen against the basket of currencies. US Treasury prices have fallen.

Strong demand

Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, rose to 2.7% from 2.5% in the fourth quarter, although the coronavirus-driven coronavirus case hit by the cold wave is optional.

The loss of epidemic money from the government was partially offset by rising wages in a tight labor market. Government spending fell for the second consecutive quarter.

A separate report from the Department of Labor on Thursday reinforced the labor market situation by showing that the initial demand for state unemployment benefits fell seasonally from 5,000 to 180,000 in the week ending April 23. There is a record of about 11.3 million job openings at the end of February. , Employers are desperately hanging on to their employees.

Even after rising food and petrol prices, there are no signs of consumers retreating. Government inflation in the economy rose to 7.8%, the fastest in 41 years after rising 7.0% in the fourth quarter. By all means, inflation has exceeded the Fed’s 2% target.

At least $ 2 trillion in additional savings saved during the epidemic is providing a cushion against inflation.

Labor shortages have seen an increase in business investment, with equipment costs rising 15.3% in the last quarter. They mostly bought computers and industrial equipment.

This is combined with solid consumer spending to raise final sales to private domestic buyers at a 3.7% rate. This measure of domestic demand, excluding trade, inventory and government spending, grew by 2.6% in the fourth quarter. Final sales to individual home buyers account for about 85% of the total cost.

The housing market has gained another second consecutive quarter, but with the 30-year fixed mortgage shooting above 5%, the outlook is uncertain.

While concerns remain that the Fed could aggressively tighten monetary policy and push the economy into recession, most economists are unsure, pointing to strong domestic demand and signs that inflation is peaking.

The last quarter was driven by consumer spending services. Changes in product demand will help reduce pressure on the supply chain, although coronavirus-related lockdowns in China pose a risk.

“The US economy is nowhere near the recession,” said Gus Foucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “Underlying demand remains strong, and the labor market is in excellent shape. Growth will resume in the second quarter.” – Lucia Mutikani / Reuters