The united states economic growth it unexpectedly contracted in the first quarter as a resurgence in Covid-19 cases disrupted activity, but the decline in output paints a misleading picture of the economy amid robust domestic demand.
The Gross Domestic Product (GDP) fell at an annualized rate of 1.4% between January and March, the Commerce Department reported Thursday in its advance estimate of GDP. It was the first decline since the pandemic-induced recession nearly two years ago. The economy grew at a solid 6.9% pace in the fourth quarter.
Economists polled by Reuters had forecast the economy to grow at a 1.1 percent pace. Estimates ranged from a 1.4% contraction rate to a 2.6% growth rate.
The drop in output reflected a larger trade deficit and a moderate pace of stock builds. Although the headline figure might cause some to warn of stagflation and recession, it is not a true reflection of the economy.
The consumer spending was strong and business investment in equipment accelerated considerably. The result is a measure of domestic demand – excluding trade, stocks and government spending – that rose sharply from the fourth-quarter pace of 2.6 percent. Final sales to private domestic buyers account for approximately 85% of aggregate spending.
It is expected that the Federal Reserve raise interest rates by 50 basis points next Wednesday and start cutting your asset holdings soon. The US central bank raised its official interest rate by 25 basis points in March, the first rate hike in more than three years, in its fight against inflation. Annual consumer prices rose in March at their fastest pace in 40 years.
Although food and gasoline prices have skyrocketed, there are still no signs that consumers are reining in spending.
The strong ones salary increases in an increasingly tight labor market and excess savings of at least $2 trillion accumulated during the pandemic are providing a cushion against inflation.
The strengthening of labor market conditions was reinforced by a separate report from the Department of Labor, which showed that initial claims for state jobless benefits fell by 5,000, to a seasonally adjusted figure of 180,000, in the week ended April 23.
Economists had expected 180,000 applications to be filed in the last week. According to data from Bank of America Securities, lower-income consumers, who tend to be disproportionately affected by inflation, showed greater resistance.
Still, there remains concern that the Fed could aggressively tighten monetary policy and tip the economy into recession in the next 18 months. The housing market is already showing signs of slowing, with the 30-year fixed mortgage soaring above 5 percent.
But much will depend on how quickly geopolitical tensions and supply chains ease, and whether inflation subsides.