Economic Shrinkage Signals Likely Recession
The US economy shrank by a whopping 1.4% during Q1 2022, reports the Commerce Department, marking the worst quarterly performance since the early months of the pandemic.
“You can’t read too much into this number, but I do have significant concerns about the risk of recession, both in the US and also in Europe and China, possibly all reinforcing each other like the perfect storm,” admits Kenneth Rogoff, a Professor of Economics at Harvard.
To compare, GDP increased by 1.68% from Q3 to Q4 2021 and dipped by 0.3% from Q4 2021 to Q1 2022. Overall economic growth for 2021 was 5.7%, the fastest gain since 1984.
The recent dip in growth is largely the result of labor shortages, supply chain issues, fading fiscal stimulus, and inflation that have inhibited the post-pandemic recovery many had hoped to see. Economists had actually predicted a GDP increase of 1.1% for Q1 2022.
“Todays shock drop in GDP is a wake-up call that the economy isn’t as strong as we all thought,” warns Chris Zaccarelli, an investor with Independent Advisor Alliance. “It’s possible that GDP gets revised higher next month, as this is just the first release and there will be two revisions, but it is a warning sign.”
GDP growth can be hard to predict during huge swings in either direction, but nobody can ignore the rising cost of goods, services, groceries, and fuel. According to The Washington Post, prices have jumped by more than 8% during the past 12 months.
Other factors at play include the war in Ukraine, a dramatic shift in US importing, and changes in retail inventory. US imports jumped by nearly 20% during the first 3 months of this year as businesses and consumers searched for cheaper goods overseas. Exports dropped by 6% during that same time frame, widening the trade deficit.
In addition, many businesses purchased less inventory during Q1 2022 because they had plenty of merchandise leftover from a spending spree late last year designed to guard against supply chain disruptions.
On a brighter note, business investment and consumer spending increased by 3.6% during Q1 2022 and unemployment dropped to 3.6% (the lowest since the start of the pandemic). Major credit card companies report robust spending, especially on vacation and international travel.
“Huge miss on GDP this morning, but just looking at the headlines is misleading,” notes Cliff Hodge, an investor with Cornerstone Wealth. “We’d rate the report neutral overall. Trade, inventories, and government spending all dragged, but the consumer held up and business investment was strong.”
Even so, the Commerce Department’s report bodes ill for those who fear the war in Ukraine could trigger a recession and the International Monetary Fund (IMF) has already revised its estimate for global GDP growth in 2022 from 4.4% down to 3.6%.
Speaking to representatives from the World Bank and IMF last week, Federal Reserve Chairman Jerome Powell admitted it would be challenging to tame inflation without harming the economy. “Our goal is to use our tools to get demand and supply back in sync, so inflation moves back into place, without a slowdown that amounts to a recession,” said Powell. “I don’t think you’ll hear anyone at the Fed say that’s straightforward and easy. It’s going to be challenging.”
Whatever happens, the situation is sure to impact Democrats’ chances during the midterm elections. But when asked about the recent dip in GDP, President Joe Biden said he wasn’t concerned. “The American economy – powered by working families – continues to be resilient in the face of historic challenges,” he said, claiming the GDP figure was the result of “technical factors.”
Republicans view the situation in a different light.
“Runaway inflation is crushing working American families on Democrats’ watch,” said Senate Minority Leader Mitch McConnell (R-KY). “No longer are Democrats just presiding over a disappointing recovery; now they’ve thrown the recovery into reverse, and they’re going backwards.”
Editor’s Note: Biden has been claiming credit for the rebound of the economy are the massive pandemic dip. But he has not been able to sustain growth. Inflation is rampant, the supply chain hasn’t recovered and restlessness in employment (record numbers of people quitting) has added instability.
Remember, a recession is two quarters of declining GDP in a row. Technically, we are already there, but one more quarter will have psychological effects. And remember the Fed just raised interest rates by a half percent, which is usually done to slow down and overheated and inflationary economy.