May 28, 2022
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US economy eyes strong 2021 finish as labor market tightens, spending accelerates

US economy shrinks in first quarter; trade, inventories mask underlying strength

WASHINGTON — The US economy unexpectedly contracted in the first quarter amid a resurgence in coronavirus illness 2019 (COVID-19) circumstances and a drop in pandemic aid cash from the federal government, however the decline in output is deceptive as home demand remained robust.

The first lower in gross home product for the reason that brief and sharp pandemic recession almost two years in the past, reported by the Commerce Division on Thursday, was principally pushed by a wider commerce deficit as imports surged, and a slowdown in the tempo of stock accumulation.

A measure of home demand accelerated from the fourth quarter’s charge, allaying fears of both stagflation or a recession. The Federal Reserve is predicted to hike rates of interest by 50 foundation factors subsequent Wednesday. The US central financial institution raised its coverage rate of interest by 25 foundation factors in March, and is quickly more likely to begin trimming its asset holdings.

“The economy is still showing some resilience, but the first-quarter GDP report signals the start of more moderate growth this year and next, largely in response to higher interest rates,” mentioned Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Despite the contraction, the Fed has little choice but to hike aggressively in May to corral inflation.”

Gross home product (GDP) fell at a 1.4% annualized charge final quarter, the federal government mentioned in its advance GDP estimate. The economy grew at a sturdy 6.9% tempo in the fourth quarter. Economists polled by Reuters had forecast GDP development rising at a 1.1% charge. Estimates ranged from as little as a 1.4% charge of contraction to as excessive as a 2.6% development tempo.

The economy additionally took successful from supply-chain challenges, employee shortages and rampant inflation. Final quarter’s decline is a head pretend as GDP stays 2.8% above its stage in the fourth quarter of 2019 and the economy grew 3.6% on a year-on-year foundation. Additional, 1.7 million jobs have been created in the first quarter and manufacturing output grew at a 5% tempo.

“It is nonsense that real GDP declined,” mentioned Conrad DeQuadros, senior financial advisor at Brean Capital in New York.

However the mismatch hints at weaker productiveness final quarter.

Entrance-loading by companies petrified of shortages due to the Russia-Ukraine battle contributed to a surge in imports. Exports tumbled, resulting in a pointy widening of the commerce deficit, which chopped 3.20 proportion factors from GDP development, probably the most for the reason that third quarter of 2020. Commerce has now been a drag on development for seven straight quarters.

Companies have turned to imports to fulfill demand, with native producers missing the capability to spice up manufacturing. Enterprise inventories elevated at a $158.7 billion tempo, slowing from the sturdy $193.2 billion charge in the October-December quarter. Stock funding lower 0.84 proportion level from GDP development.

Shares on Wall Avenue have been increased as buyers shrugged off the drop in GDP. The greenback rose in opposition to a basket of currencies. U.S. Treasury costs fell.

STRONG DEMAND 

Development in client spending, which accounts for greater than two-thirds of US financial exercise picked up at a charge of two.7% from the fourth-quarter’s 2.5% tempo, regardless of taking successful from the winter wave of coronavirus circumstances, pushed by the Omicron variant.

The lack of pandemic cash to households from the federal government was partially offset by rising wages amid a tightening labor market. Authorities spending fell for a second straight quarter.

Strengthening labor market circumstances have been bolstered by a separate report from the Labor Division on Thursday exhibiting preliminary claims for state unemployment advantages fell 5,000 to a seasonally adjusted 180,000 for the week ended April 23. With a close to report 11.3 million job openings on the finish of February, employers are desperately hanging on to their staff.

Even with meals and gasoline costs hovering, there isn’t any signal but of shoppers pulling again. The federal government’s measure of inflation in the economy surged at a 7.8% charge, the quickest in 41 years, after rising at a 7.0% tempo in the fourth quarter. Inflation by all measures has overshot the Fed’s 2% goal.

At the very least $2 trillion in extra financial savings accrued in the course of the pandemic are offering a cushion in opposition to inflation.

Employees shortages noticed companies boosting funding, with spending on gear rising at a 15.3% charge final quarter. They principally purchased computer systems and industrial equipment.

That mixed with stable client spending to hoist closing gross sales to non-public home purchasers at a 3.7% charge. This measure of home demand, which excludes commerce, inventories and authorities spending, elevated at a 2.6% charge in the fourth-quarter. Remaining gross sales to non-public home purchasers account for roughly 85% of combination spending.

The housing market notched one other second straight quarterly achieve, however with the 30-year mounted mortgage taking pictures above 5%, the outlook is unsure.

Whereas issues stay that the Fed may aggressively tighten financial coverage and tip the economy into recession, most economists should not satisfied, pointing to the robust home demand and indicators that inflation might have peaked.

Shopper spending final quarter was pushed by companies. The shift in demand from items is probably going to assist ease strain on provide chains, although the coronavirus-related lockdowns in China pose a danger.

“The US economy is not anywhere close to recession,” mentioned Gus Faucher, chief economist at PNC Monetary in Pittsburgh, Pennsylvania. “Underlying demand remains strong, and the labor market is in excellent shape. Growth will resume in the second quarter.” — Lucia Mutikani/Reuters

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