The US economy contracted in the first quarter; Trade and stocks hide the underlying power 2022-04-28 16:35:00

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  • First-quarter GDP fell by 1.4%.
  • Inventories, trade hides the underlying economic power
  • increase business investment; Strong consumer spending
  • Weekly jobless claims drop from 5,000 to 180,000

WASHINGTON (Reuters) – The U.S. economy unexpectedly contracted in the first quarter amid a resurgence of COVID-19 cases and a drop in pandemic relief money from the government, but the decline in production is misleading as domestic demand remains strong.

The first drop in gross domestic product since the short and severe pandemic recession nearly two years ago, the Commerce Department reported Thursday, was mostly driven by a broader trade deficit as imports rose and the pace of inventory buildup slowed.

The measure of domestic demand accelerated from the fourth-quarter rate, allaying fears of a slump or recession. The Federal Reserve is expected to raise interest rates by 50 basis points next Wednesday. The US central bank raised its policy rate by 25 basis points in March, and is likely to soon begin reducing its asset holdings.

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“The economy is still showing some resilience, but the first-quarter GDP report points to the start of more moderate growth this year and next, largely in response to higher interest rates,” said Sal Gutierre, chief economist at BMO Capital Markets in Toronto. . “Despite the deflation, the Fed has no choice but to raise aggressively in May to control inflation.”

In its advance estimate of gross domestic product, the government said gross domestic product fell at an annual rate of 1.4 percent in the fourth quarter. The economy grew at a robust 6.9% pace in the fourth quarter. Economists polled by Reuters had expected GDP growth to rise at a rate of 1.1%. Estimates ranged from a contraction rate as low as 1.4% to a high growth rate of 2.6%.

The economy has also been hit by supply chain challenges, labor shortages and rampant inflation. The fourth-quarter decline is considered fake as GDP is still 2.8% higher than its level in the last quarter of 2019 and the economy has grown 3.6% year-over-year. Moreover, 1.7 million jobs were created in the first quarter and industrial production grew at a rate of 5%.

“It’s nonsense that real GDP is down,” said Conrad de Cuadros, chief economic adviser at Brian Capital in New York.

But the mismatch points to weak productivity in the last quarter.

Trade companies fearing shortages due to the Russo-Ukrainian war contributed to the increase in imports. Exports slumped, leading to a sharp widening of the trade deficit, which slashed 3.20 percentage points of GDP growth, the most since the third quarter of 2020. Trade has now been a drag on growth for seven straight quarters.

Businesses have turned to imports to meet demand, as local manufacturers lack the ability to ramp up production. Business inventories increased at a pace of $158.7 billion, slowing from the strong rate of $193.2 billion in the October-December first quarter. Inventory investment reduced 0.84 percentage points of GDP growth.

Stocks rose on Wall Street as investors shrugged off the drop in GDP. The dollar rose against a basket of currencies. US Treasury bond prices fell.

Gross domestic product

strong demand

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, rebounded at a 2.7% rate from the fourth-quarter pace of 2.5%, despite being hit by the winter wave of coronavirus cases, driven by Omicron. alternative.

The loss of pandemic money to households from the government was partially offset by higher wages amid a tightening labor market. Government spending fell for the second consecutive quarter.

Labor market conditions were boosted by a separate report from the Labor Department on Thursday showing that initial claims for state unemployment benefits fell by 5,000 to 180,000 seasonally adjusted for the week ending April 23. With nearly 11.3 million jobs available at the end of February, employers are holding on tight to their workers.

Unemployment claims

Even with rising food and gasoline prices, there is no sign yet that consumers are holding back. The government’s measure of inflation in the economy jumped 7.8%, the fastest in 41 years, after rising 7.0% in the fourth quarter. Inflation by all accounts has exceeded the Fed’s 2% target.

At least $2 trillion in excess savings accumulated during the pandemic provides inflation protection.

The labor shortage has spurred companies to invest, with spending on equipment increasing an average of 15.3% last quarter. They mostly bought computers and industrial machines.

This was accompanied by strong consumer spending to raise final sales to local private buyers by 3.7%. This measure of domestic demand, which excludes trade, inventories and government spending, increased 2.6% in the fourth quarter. Final sales to local private buyers account for about 85% of total spending.

The housing market posted another quarterly gain in a row, but with the 30-year fixed-rate mortgage rising above 5%, the outlook is uncertain.

While there are still concerns that the Federal Reserve may tighten monetary policy aggressively and push the economy into recession, most economists are not convinced, citing strong domestic demand and indications that inflation may have peaked.

Consumer spending in the last quarter was driven by services. The shift in demand for goods is likely to help relieve pressure on supply chains, although coronavirus-related shutdowns in China pose a risk.

Consumer spending GDP

“The US economy is nowhere near a recession,” said Jos Foucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “Primary demand remains strong, and the job market is in excellent shape. Growth will resume in the second quarter.”

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(Reporting by Lucia Mutikani) Editing by Chizu Nomiyama and Andrea Ricci

Our criteria: Thomson Reuters Trust Principles.

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