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The US economy shrank 1.4 percent in the first quarter, but consumers continued to spend

The economy is facing strains that have heightened concerns about its underlying health and raised concerns about a possible recession. Inflation weighs on households as gas and food prices soar, borrowing costs rise and the global economy is shaken by Russia’s invasion of Ukraine and China’s Covid lockdowns.

Nevertheless, the US labor market – the mainstay of the economy – remains robust. And in the January-March quarter, businesses and consumers increased their spending at an inflation-adjusted 3.7 percent per year.

Economists believe this trend is a better measure than headline GDP of the underlying strength of the economy. Most analysts expect the steady pace of spending to support economic growth, although the outlook remains highly uncertain.

The recent quarter’s slowdown was followed by strong growth in the final quarter of 2021, driven by a rise in inventories as companies stockpiled in anticipation of holiday spending. Companies continued to build inventories in the most recent quarter, but they did so at a slower pace, hampering growth in the process.

Imports also rose sharply in the January-March quarter as businesses and consumers bought more goods from abroad, while US exports rose at a slower pace. This discrepancy widened the trade deficit and weighed on growth for the quarter.

The weakness of the overall growth of the economy contrasts with the vitality of the labor market. At 3.6 percent, the unemployment rate is almost back to the pre-pandemic low half a century ago. Layoffs are at historically low levels as employers, plagued by labor shortages, hold on to their workers.

Wages are rising steadily as companies compete to attract and retain workers, a trend that has helped maintain consumer spending power. At the same time, however, this spending has helped fuel inflation, which hit 8.5 percent in March compared to 12 months earlier.

Fed Chair Jerome Powell has announced a rapid series of rate hikes to combat higher prices. The Fed is set to raise its short-term interest rate by half a percentage point next week, the first such large hike since 2000. At least two more half-point hikes — double the more typical quarter-point hike — are expected at subsequent Fed meetings. They would be tantamount to one of the Fed’s fastest rate-hike streaks in decades.

Powell is betting that with near-record job listings, healthy consumer spending and unusually low unemployment, the Fed can slow the economy enough to tame inflation without triggering a recession. However, most economists are skeptical that the Fed can achieve this goal with inflation this high.

The US economy shrank 1.4 percent in the first quarter, but consumers continued to spend

Source link The US economy shrank 1.4 percent in the first quarter, but consumers continued to spend

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