According to Bloomberg News, the US economy, for the first time since 2020, shrank, implying a surge in imports tied to solid demand of consumers, which has suggested that there will be an imminent return of growth.
The surprise contraction and its impacts
While surprise contraction has added to the political problem for President Biden, it does not seem that will discourage the Federal Reserve from moving back about its plans to aggressively hike the interest rates so that it can tame inflation.
In the first quarter, the GDP or gross domestic product dropped at a 1.4% annualized rate following a pace of growth recorded as 6.9% towards the end of last year, as stated by the Commerce Department’s preliminary assessment on Thursday. In the Bloomberg survey by economists, the median projection was called for an increase of 1%.
The report, which is said to be more of an illustration of calculations of GDP, tends to be volatile from one quarter to another, not essentially implying weakness in the economy or as a recession sign. The attributable factor for the sudden contraction was a decline in exports and a surge in imports, together with a slower business stockpile buildup. On a year-over-year basis, there was a growth of the economy by 3.6%.
Trade and inventories together subtracted approximately 4% points from the headline growth. There was a shrinking of government spending weighing on GDP. However, the real final sales related to domestic buyers, which is a measure of the underlying demand that can strip out the inventories component and trade, was found to get accelerated to a 2.6% annualized rate.
Bloomberg News reports that with solid spending and quicker inflation, Federal monetary policy will still go ahead with a half-point hike next week. Nevertheless, officials must strike a balance between stringent policies with risks to demand.
The economy is facing other headwinds like the effects of the ongoing Russian invasion of Ukraine. Growth prospects in Europe are declining, the Chinese government’s severe pandemic affected lockdown solutions, and a shortfall in some raw materials has left the supply chain industry disrupted and haywire.
The S&P 500 surged, and the yield on the 10-year Treasury note continued to remain higher together with the dollar.
The contraction, Biden said, was due to “technical factors,” stating that investment, consumer spending, and employment all have remained strong.
Consumer spending
Data from the Commerce Department show that the biggest part of the economy, personal consumption surged by annualized 2.7% in the first quarter, in comparison to 2.5% towards the end of 2021. As far as services spending is concerned, it added 1.86 percentage points to the gross domestic product, whereas goods purchases became stagnant, reflecting changes in consumer behavior.
Bloomberg News reports that the personal consumption price index, which excludes food and energy, a measure of inflation closely monitored by Fed officials, grew by an annualized 5.2% in the last quarter. The monthly PCE data will be made available for April on Friday.
