Thursday saw the Commerce Department reporting a 1.5% drop in GDP for the first quarter of 2022. This was worse than expected and it is believed to be due to a sluggish rate of business and private investment failing to keep up with high consumer spending activity.
The Dow Jones had initially predicted that the US GDP would only fall by 1.3%, but the combined factors of the Omicron variant, war in Ukraine, supply chain issues and the continued trade deficit added to the gloomy economic picture. In particular the slow restocking of products in stores and goods in warehouses is thought to have had a large impact over the disappointing GDP figures.
It marks the most difficult quarter in the US economy since the second quarter of 2020 – the moment that the nation’s GDP slumped over 31% as an economic shutdown was introduced to combat the spiraling Covid-19 infection rates.
Can the US economy bounce back again?
Analysts have high hopes that the US economy has what it takes to come back stronger in the second quarter of the year. It is believed that there will be a growth of between 1.5% and 3% in the second quarter as the issues like the supply chain crisis and the pandemic begin to subside.
While even the most optimistic predictions are fairly mixed, most believe that it is the actions of the Federal Reserve that will have the biggest impact on the economic recovery. The Fed’s main mission appears to be bringing inflation back down to a reasonable rate while keeping the risk of recession at bay.
The good news is that consumer spending appears to be improving across the US. While the nation has been stricken with inflation rates of over 8%, personal consumption expenditures were up 3.1% which is a fair improvement over the initial estimates of 2.7%.
This has been mirrored by positive news from the labor market that saw a decrease in the number of jobless claims of 8,000 in May, along with a steady increase in wages that have struggled to keep up with the rate of inflation. It is among the lower-income households of the US that the effects of inflation have been most harshly felt with the cost of essentials like groceries and fuel reaching record highs.
The cost of living crisis appears to be having an impact on the approval ratings of President Joe Biden who has seen his popularity slide to its lowest point, with inflation being named as a key reason.
Despite the inflation problem, the US economy as a whole is largely healthy. Alongside the positive news about consumer spending, there has been a rise of 6.8% in business investment in productivity sectors like equipment and software.
But with some aggressive interest rate hikes from the Federal Reserve still due, a sluggish housing market and the uncertainty of war in Ukraine, it seems like it could be a difficult few months for the US economy.