Economy Shrinks 1.4% Below Expectations

As per recent reports, in the first quarter, the United States economy shrank to 1.4%, a significant drop from the previous quarter and below predictions, which fluctuated between slow and negative growth.

Economists had predicted a slowdown in growth after the economy painfully grew at a slow 6.9% annual rate in the fourth quarter of 2021. However, according to consensus forecasts, the first quarter’s annualized growth was expected to be at 0.6 percent.

The report further stated that the decrease in GDP was due to the decline in private inventory investment, federal government spending, exports, and state and local government spending while the imports increased. In addition, there was an increase in personal expenditures (PCE), non-residential fixed investments, and fixed investments.

The World Bank and International Monetary Funds recently reduced their global economy’s growth in 2022 estimates, with the IMF reducing its projections from 4.4% to 3.6%. The reason for this reduction? Russian invasion of Ukraine.

Although the United States is thought to be more immune to the war’s effects on global supply chains and oil costs, it is projected to be impacted by the Federal Reserve’s interest rate hiking cycle, which began in March.

Caricature of the economy

Last week, the Conference Board released its Index of Leading Indicators showing a small increase for March even though it avoided the effects of the war. As per the organization’s projection, the United States economy will increase by 3% this year.

Nonetheless, the labor market continued to show strength as the number of Americans filing first-time claims for unemployment last week drastically fell by 5,000 from the revised level of 180,000. In addition, there was a four-week moving average drop of 2.250 from the previous period to 179,750.

However, the two important developments of the economy, consumer spending and business investments, continued to grow.

As per some experts, there is an increasing possibility of recession during the next 12 months, around 30% or so. However, those estimates were made before the most recent GDP data was released.

A well-known economist wrote that even though the United States economy does not appear to be on the verge of another slump, the risk of recession next year cannot be ruled out.

They further added that the elevated forecast of recession probability is due to the recent surge in inflation. In addition, the consumer’s purchasing power has eroded in recent months. For seven consecutive months, the purchasing power has been on a decline.

They further added that consumers had reduced their savings; thus, they can maintain a positive rate of real spending. However, consumers will have to eventually cut back if the inflation rate continues to soar high.

As the inflation is running at roughly 8%, eating through the consumer’s budgets, the consumers would face difficulty prioritizing their spending. The consumer has to spend $300 a month to buy food, fuel, and housing, and this could only be the beginning. It wouldn’t be wrong to say that more and more people are using fewer streaming services, and many will eventually stop upgrading their phones. The Federal Reserve is increasing the interest rate; thus, they are in no position to cushion amid a slowing economy.
The greatest risk to investors is a Fed that overtightens to suppress demand to the point that supply chain inflation and policymakers have no control over it. It was rather unfortunate for the GDP not to meet the expectation. Still, it was equally not surprising for the United States economy to remain volatile amid the geopolitical turbulence created by the war in Ukraine, disruption of the global supply chain, increasing inflation, and the ongoing COVID-19 pandemic have all taken a toll on global GDP growth rate.