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The US economy unexpectedly contracted by 1.4% on an annual basis in the first three months of 2022 after more than a year of rapid growth, according to a report by the Bureau of Economic Analysis published on Thursday. New data fuels fears of a recession amid steady inflationary pressures and uncertainty about the war in Ukraine.
The delay – the first since the covid recession in April 2020 – marks a reversal of the rapid pace that has followed intense fiscal and monetary stimulus as a result of the pandemic. Last year, for example, the US economy grew by 5.7 percent, the fastest decline since 1984.
Although most economists still believe that expansion has a lot of momentum, especially given the strength of the labor market, fears of a recession are rising as inflation shows little sign of easing. The weakness comes amid alarming signs that some of the world’s largest economies, including China and Europe, are stagnant.
“There are definitely clouds on the horizon,” said Kenneth Rogoff, a professor of economics at Harvard University and a former chief economist at the International Monetary Fund. “You can’t read too much about this number, but I have significant concerns about the risk or recession, both in the United States and in Europe and China, probably all reinforcing each other like the perfect storm.
Among the factors driving the economy down in early 2022 were declining purchases of inventory from retailers and the growing gap between US exports and imports. The country’s trade deficit in goods – the gap between inbound and outbound products – widened to a record high in March, the trade ministry said this week.
In addition, many companies bought less inventory than usual in early 2022, as they had residual goods from the end of last year, when they stocked up on additional goods to protect themselves from shortages and delays in the supply chain. This decline in purchases is likely to artificially lower GDP, economists say.
“We have a sustainable economy, but there are signs of weakness,” said Diane Swank, chief economist at Grant Thornton. “The reality is that rising interest rates and higher prices have consequences.”
Still, many parts of the economy remain stable. Employers have created more than 400,000 jobs for 11 consecutive months, sending unemployment to a new low in the pandemic and close to the lowest level in decades. And despite higher costs, families and businesses continue to spend and invest.
However, the contraction creates new complications for the Biden administration and Democratic MPs, who have so far pointed to a strong recovery as a sign that the country is on the right track.
One of the biggest pressure points in the economy is inflation. Prices have risen 8.5 percent in the past year, a major challenge for the Biden administration and the Federal Reserve.
The central bank began raising interest rates last month in hopes of slowing the economy enough to block prices, and Democrats are exploring new policies that they hope could cope with high gas prices.
The Fed’s efforts have already begun to limit demand for some large purchases. Sales of new homes are declining for three consecutive months as rising interest rates deter potential home buyers. Mortgage rates, which have hovered around 3 per cent for years, topped 5 per cent this month for the first time in more than a decade.
Chuck Wilson, co-owner of Boston Builders, a custom home builder in Westminster, Maryland, said demand for new housing has slowed significantly in recent weeks following the Fed’s decision. At the same time, almost every building component – including tiles, siding and timber – has become more expensive, he added.
“Homebuyers are backing out because interest rates are rising and prices are above the roof,” Wilson said. “Now I am finishing a house, but I have not signed new contracts. There are very few good things to report. “
Economists say some form of slowdown was inevitable, given the rapid recovery of the economy last year. But they remain divided over whether the latest report is a one-off slowdown or a sign that the economy is deteriorating. Many still say they expect the economy to recover later this year, with gross domestic product growing by between 2.5 and 3 percent in 2023, despite road bumps.
“When the Fed has to raise interest rates as much as they say they will, the risks of a recession are high,” said Mark Zandi, chief economist at Moody’s Analytics. “There is simply no elegant way for the economic plane to land on the letters. It can land without an accident, but it will be a terrible ride.
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