WASHINGTON (AP) — The U.S. economy shrank in the first three months of the year, and faces threats from high inflation and rising interest rates, yet economists foresee a return to growth for the rest of 2022 based on the strength of the job market and consumer spending.
The 1.4% quarterly decline in gross domestic product — the first contraction since the pandemic hit in 2020 — is not likely a prelude to recession, economists say. That may bring little comfort to President Joe Biden and Democrats, who face mid-term elections this year in which rising prices for food, energy and other essentials will be a major theme of Republican opposition.
— Imports soared nearly 20% as Americans spent heavily on foreign-made goods, while exports fell almost 6% as growth slowed overseas — a widening of the trade deficit that subtracted 3.2 percentage points from GDP.
— Businesses had built inventories aggressively ahead of last year’s holiday shopping season, when they feared pandemic-related supply shortages, so they restocked more slowly at the start of 2022, denting GDP by 0.8 percentage points.
As a result, first quarter GDP — the nation’s total output of goods and services — fell far below the 6.9% annual growth rate in the fourth quarter of 2021.
However, rising wages supported robust spending by households, and higher profits drove investment by companies. These factors suggest strong fundamentals for the U.S. economy, even in the face of challenges from the pandemic, the war in Ukraine and the Federal Reserve’s plans to raise interest rates to fight inflation.
“The report isn’t as worrisome as it looks,” said Lydia Boussour, lead U.S. economist at Oxford Economics. “The details point to an economy with solid underlying strength that demonstrated resilience in the face of Omicron, lingering supply constraints and high inflation.”
The U.S. economy is in an unusual and challenging position.
The job market — the most important pillar of the economy — remains robust, with the unemployment rate near a 50-year low of 3.6%, and wages rising steadily. And in the January-March quarter, businesses and consumers increased their spending at a 3.7% annual rate after adjusting for inflation.
Economists consider these trends a better gauge of the economy’s core strength than the latest GDP figure.
Still, serious threats have emerged. Supply chain disruptions in China and elsewhere are still a pandemic-era reality, and the war in Ukraine is contributing to higher inflation, which erodes consumers’ spending power. Last month, prices jumped 8.5% from a year earlier, the fastest such rise in four decades.
“We are at a turning point in the economy,” said Gregory Daco, chief economist at tax advisory firm EY-Parthenon. “The pace of growth is moderating.”
The first quarter’s weak showing contrasts with last year’s robust rebound from the pandemic, which was fueled in part by vast government aid and ultra-low interest rates. With stimulus checks and other government supports having ended, consumer spending has slowed from its blistering pace in the first half of last year.
Last quarter’s negative GDP number also undercuts a key political message of President Biden. The president has pointed to rapid growth as a counterpoint to soaring inflation. Compounding Biden’s difficulties, Russia’s invasion of Ukraine and rising COVID cases overseas are weighing on the economy and heightening inflation pressures. Many companies are also still struggling to obtain the parts and supplies they need from tangled supply chains.
The Plano, Texas-based burger chain MOOYAH faces higher costs for meat, buns and packaging supplies, and has raised wages to attract and keep workers.
“Just about every aspect of doing business has gotten significantly more expensive,” said Doug Willmarth, the company’s president.
Yet despite supply chain snags tied to the pandemic, MOOYAH still plans to open 20 more restaurants this year. “We are big believers in American consumers and the American economy,” he said.
Although imports surged in the first quarter, COVID lockdowns in China are likely to perpetuate supply shortages this year. Ford and General Motors said this week that they still can’t get all the computer chips they need, costing them sales and forcing temporary plant closures.
The global economy is expected to grow more slowly this year, according to the International Monetary Fund. It foresees the Ukraine war and COVID slowing global growth to 3.6% this year, down from 6.1% last year.
Thursday’s GDP report showed that consumers are adjusting their spending patterns as the pandemic fades and as higher costs for food and gas eat into household budgets. Adjusting for inflation, spending on clothes, gasoline, and groceries fell in the first quarter. But Americans spent more on services, including travel and dining out.
The Fed had hoped that such a shift would bring down inflation, as goods prices have shot up more than services in the past year. But now prices for airline tickets, hotels, and restaurant meals are also rising.
Fed Chair Jerome Powell has signaled plans for a rapid series of rate increases to combat higher prices. The Fed is set to raise its key short-term rate by a half-percentage point next week, the first hike that large since 2000. At least two more half-point increases – twice the more typical quarter-point hike — are expected at subsequent Fed meetings. They would amount to one of the fastest series of Fed rate hikes in decades.
Powell is betting that with job openings at near-record levels, consumer spending healthy and unemployment unusually low, the Fed can slow the economy enough to tame inflation without causing a recession. Whether the Fed can pull that off is one of the major tests for the U.S. economy in 2022.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
