The U.S. economy contracted 1.4 percent in the first quarter, new Bureau of Economic Analysis (BEA) data show. The market had forecast growth of 1.1 percent.
This is the first time the world’s largest economy experienced negative growth since the second quarter of 2020.
According to the BEA, the decline in the GDP was driven by a drop in private inventory investment, exports, and federal, state, and local government spending. Imports rose in the three months ending in March.
In addition, residential and non-residential fixed investment increased, while personal consumption expenditures (PCE) also rose.
Personal income advanced $268 billion in the first quarter, while disposable personal income climbed to $216.6 billion. The personal savings rate tumbled to 6.6 percent, down from 7.7 percent in the previous quarter.
“The decrease in private inventory investment was led by decreases in wholesale trade (mainly motor vehicles) and retail trade (notably, ‘other’ retailers and motor vehicle dealers),” the BEA said in a statement. “Within exports, widespread decreases in nondurable goods were partly offset by an increase in ‘other’ business services (mainly financial services). The decrease in federal government spending primarily reflected a decrease in defense spending on intermediate goods and services. The increase in imports was led by increases in durable goods (notably, nonfood and nonautomotive consumer goods).”
The White House had braced reporters for slower economic growth to start the year, citing a drop in business inventory accumulations. But an administration official told Reuters that “economic conditions are still very, very strong.”
Another senior administration official said in an interview with CNBC that the U.S. economy will witness strong GDP growth this year, despite inflation risks and the global supply chain crisis.
“When you put it all together, the U.S. economy is in a strong position, even as we face some additional risks in the months ahead,” the person said.
What the Experts Predicted
For weeks, financial experts had been anticipating an abysmal GDP reading for the January-to-March period.
Economists polled by Reuters had penciled in a 1.1 percent jump in the first-quarter GDP.
The Federal Reserve Bank of Atlanta’s final GDPNow model estimated growth at 0.4 percent.
Earlier this month, the Conference Board projected that the U.S. GDP growth rate would slow to an annualized rate of 1.5 percent, alluding to Russia’s invasion of Ukraine, tighter monetary policy, higher inflation expectations, and a reduction in consumer purchasing power.
While the organization does not expect a recession this year, it is concerned about the multiple factors that might lead to a contraction in growth, particularly the U.S. central bank’s mistakes, a resurgence of COVID-19, and soaring commodity prices.
Morgan Stanley’s formal projection was 0.6 percent, although it did not entirely rule out a negative print in GDP growth for the first three months of 2022.
“A negative print in GDP growth in the first quarter, should it actually happen, would likely be due to two volatile components in the national income and product accounts: net exports and inventories,” the bank said in a research note. “The underlying growth momentum in the economy appears to have remained reasonably solid in the first quarter.”
The central question that many have is if a recession is on the horizon?
In recent weeks, many Wall Street firms have raised their recession odds. The debate also seems to be on the severity of a contraction, with some projecting a considerable decline and others calling for a modest drop in GDP.
“I wouldn’t assume the next recession will be as deep as the last two, we’re probably overdue for a more garden-variety downturn,” said Nick Reece, a portfolio manager at Merk Investments, in a research note.
Deutsche Bank is more skeptical of the post-pandemic economy, warning that the United States should be prepared for a significant economic downturn.
With the Federal Reserve likely to become more aggressive in tightening monetary policy through a blend of rate hikes and balance sheet reduction, the financial institution says the financial upheaval in response to these developments “will push the economy into a significant recession by late next year.”
“We will get a major recession, but our strongly held view is that the sooner and the more aggressively the Fed acts, the less longer-term damage to the economy there will be,” Deutsche Bank economists, including David Folkerts-Landau, the group chief economist and head of research, wrote in a report Tuesday.
Goldman Sachs raised the chances of a recession to 35 percent over the next two years. Bloomberg Economics’ recession-probability model estimates a 44 percent chance of a recession before January 2024. Merk Research put the odds of a downturn at 1-in-3.
Fed Chair Jerome Powell has repeatedly stated that his objective is to achieve a soft landing: trim inflationary pressures while averting an economic downturn and higher unemployment.
According to the CME FedWatch Tool, the market is betting on 50-basis-point rate hikes at the next two Federal Open Market Committee (FOMC) policy meetings.
What Does This Mean for Wall Street?
It is earnings season for Wall Street, so investors are placing more of a focus on corporate quarterly reports, with price inflation and supply chain snafus. In addition, there are growing concerns surrounding reduced demand that could be the main challenge for companies in the coming months.
For an economy that is two-thirds consumption, this could dampen future GDP forecasts.
“The question into the future is how the cost of goods and energy will play into future earnings,” Marc Scudillio, the managing officer at EisnerAmper Wealth Management, told The Epoch Times. “Prices have gone up significantly in a short period of time for companies, and it will soon play out to see if the increases passed to the consumer will reduce demand, and hence future company earnings. We are planning for continued volatility and setting the tone for clients to anticipate a more challenging market.”
The financial markets have endured considerable weakness so far this year. The equities arena could trade sideways “with downside volatility for a while longer,” says Reece.
“I don’t expect a deep and prolonged bear market like that of the early 2000s or Global Financial Crisis,” he added in his note. “The last all-time high in the S&P (on Jan 3rd) was inconsistent with past major market tops across several frameworks. Nevertheless, I wouldn’t be surprised if the market chops sideways with downside volatility for a while longer, perhaps through a mild recession that occurs sometime over the next two years.”
U.S. financial markets remained in positive territory in pre-market trading, with the Dow Jones Industrial Average up 200 points and the Nasdaq Composite Index also up 200 points. The S&P 500 added about 1.1 percent.
The U.S. Treasury market was up across the board, with investors seeking shelter from sliding economic activity.
The benchmark 10-year yield rose 0.029 percent to 2.847 percent. The one-year bill edged up 0.018 percent, while the 30-year bond rose 0.026 percent.
The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, skyrocketed 0.83 percent to 103.81, adding to its year-to-date rally of more than 8 percent.
From The Epoch Times
