The US gross domestic product (GDP) contracted at an annualized rate of 1.4% in the first quarter of the year, as reported on Thursday by the Government Economic Analysis Office (BEA); a decrease of 0.4% quarter-on-quarter. The unexpected setback of the US economy is the first since the pandemic hit the country and caused, in the spring of 2020, a brief but sharp recession. The growth of activity has crashed against inflation, on the eve of the May meeting of the Federal Reserve (FED) in which a new rate hike will be announced, the second after the pandemic.
Economists had expected growth of 1.1% between January and March, according to the average of Bloomberg polls, but the data shows the significant slowdown from the pace of growth recorded in the fourth quarter of 2021, 6.9% ( 1.7% quarter-on-quarter rate). Cornered in recent months by inflation and, since March, by the impact of the war in Ukraine on energy prices, the US economy has so far shown signs of thriving health since the recovery after the health emergency.
It is precisely inflation, at a maximum in 41 years, that is mainly responsible for this contraction, along with the effect that the omicron variant of the coronavirus has had on the labor market, still dysfunctional, with more supply than demand but almost recovered with respect to the pre-pandemic levels. The office has attributed the decrease to the rebound in covid-19 cases due to the omicron variant, with a peak in mid-January, and to the reduction and in some cases completion of payments by the federal government provided for in the aid packages and stimuli to face the pandemic.
With these data, the country’s GDP in the first quarter is 2.8% higher than that registered in the fourth quarter of 2019, just before the pandemic hit the United States. In the fourth quarter, GDP was 3.1% above pre-pandemic levels.
The report underlines the bumpy road ahead for the country’s economy, and also in an election year, the mid-term elections, in November. While the threat of the coronavirus has largely receded, the same cannot be said for inflation, the foe for President Joe Biden to beat if he is to avoid an adverse outcome at the polls. Price growth accelerated to a year-on-year rate of 8.5% in March, the highest rate since 1981 and a sharp rebound from that seen at the end of 2021. The Russian invasion of Ukraine has exacerbated the problem in recent weeks. ―The data for March is the first to reflect the impact of the war―, underlining the problems in the supply chain that marked all of 2021 and increasing the price of energy and food, in addition to rents. A new perfect storm, and a serious headache, for Biden.
The gloomy GDP reading is not definitive, however, the BEA notes. The figure will be revised several times in the coming months as more data is received. The contraction has been fueled by partly temporary factors. The good data for the last quarter of 2021 was due to a massive accumulation of inventories, the way for companies to match supply with a demand that some experts do not hesitate to describe as runaway. Since most of that storage occurred in that period, companies sharply reduced their inventory spending in the first quarter, and that containment dragged down GDP significantly. Furthermore, Americans continued to spend at a record pace through February, leaving imports, which are subtracted from GDP, at very high levels.
He knows in depth all the sides of the coin.