- GDP drops 1.4% beyond earlier expectations of a low 1.3% growth.
- Fed's interest rate hikes might be a key factor in the GDP decrease.
- Recession fears fuel the uncertainty, while some experts believe the Q1 report is not definitive.
YEREVAN (CoinChapter.com) – The U.S.’s gross domestic product (GDP) declined at an annualized pace of 1.4% in the first quarter of 2022, as imports overweighed exports, a report by the Bureau of Economic Analysis (BEA) shows.
Decrease in gross domestic product
In detail, GDP tracks the monetary value of all the finished goods and services produced within a country’s borders in a specific period and is used to measure the nation’s strength.
The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased.further stated the BEA.
Experts estimated that the 8.5% pullback in defense spending alone knocked 0.3% off the final GDP reading. Moreover, the negative GDP growth rate raised eyebrows as it missed the average 1% increase estimations. For example, Atlanta Federal Reserve President Raphael Bostic earlier gouged the GDP at 1.3% annual growth in Q1.
Bostic also expressed concerns about the aggressive pace of interest rate hikes implemented by the Federal Reserve to fight the worst inflation rate in the past four decades.
Interest rates vs. GDP
An increase in government bond interest rates is one of the ways to tackle growing inflation.
Higher interest rates make borrowing money more expensive. Thus, the cost of doing business rises for public (and private) companies. Higher costs slow the demand, catching it up with supply, putting merchants under more pressure to slash prices and lure the public to buy their products.
However, higher costs and less business also mean lower revenues and earnings for public firms, potentially impacting their growth rate. Thus, forcefully increased interest rates temporarily hinder economic growth, negatively affecting the GDP.
Moreover, earlier in April, the Fed announced its plans for a $1.1 trillion quantitative tightening in 2022. Several Fed representatives viewed the planned one or more half-point interest rate increases within the year as appropriate going forward if “price pressures fail to moderate.”
Additionally, some analysts saw the decision to slash the balance sheet as frantic. For example, Stephen Stanley, the chief economist at Amherst Pierpont Securities LLC, commented on the minutes, calling out Fed’s actions as overdue.
The FOMC stayed far too easy for far too long and has belatedly realized their mistake. They are now scrambling to get policy back to neutral as quickly as they can.
Once they arrive at something close to neutral, they will have to ascertain over time how far into restrictive territory they have to move to get inflation back under control.said the expert.
Recession or not?
However, the Fed might still be far from “arriving at something close to neutral,” triggering recession fears. Experts estimated that the current market pricing “indicates the equivalent of 10 quarter-percentage-point interest rate moves.” The market pricing takes the Fed’s benchmark interest rate to about 2.75% by the end of the year.
Notably, the previous two years saw near-zero rates, which aimed at allowing recovery from the recession caused by the Covid-19 pandemic.
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Financial giant Goldman Sachs saw a nearly 35% chance of negative growth a year from now. Deutsche Bank gave a similar prognosis agreeing on a “significant recession” hitting the economy in late 2023 and early 2024. Thus, the recession could come on the back of the Fed’s further quantitative tightening.
“This is noise, not signal,” says chief economist
Meanwhile, some economists agree that the GDP’s 1.4% drop does not mean recession, albeit unexpected. For example, Ian Shepherdson, chief economist at Pantheon Macroeconomics, agreed with a positive outlook.
This is noise; not signal. The economy is not falling into recession. Net trade has been hammered by a surge in imports. Especially of consumer goods, as wholesalers and retailers have sought to rebuild inventory.
This cannot persist much longer, and imports in due course will drop outright. Net trade will boost GDP growth in Q2 and/or Q3.asserted the expert.
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The current situation in Ukraine, and global central banks engaged in a similar struggle against inflation, affected the U.S. economy and, by extension, the GDP. Additionally, Fed’s tapering policy raised questions among experts, as the interest rate hikes hindered the post-Covid growth rate. Finally, economists are divided on their expectations as the Fed “frantically” hikes up the interest rates.
Understandably, the situation triggered recession fears that will not likely subside in the upcoming months. However, further reports from the BEA will shed more light on the economic balance, correcting the expectations for 2023.