The U.S. economy contracted 1.4 percent in the first quarter. This is the first step towards recession. That unexpected summary will no doubt be discussed at next week’s Federal Reserve interest rate meeting.
The growth figures released by the US Department of Commerce have undoubtedly surprised economists. They saw growth of 1.1 percent in the first quarter of this year. Instead, they were given a 1.4 percent contraction.
Recession in production
This decline is mainly due to the decline in inventory investment, which rose in the final months of 2021, as a result of weak exports and lower government spending.
Consumer spending, which is essential to the economy, continues to rise despite this High inflationAmericans spend more on services, especially health care. This offset a small drop in the cost of goods, which shrank as a result of lower gas costs.
Due to the economic downturn in the first quarter, the first step towards recession has been taken. Officially, the recession is when the economy shrinks for two consecutive quarters. Doomsday has been around for months An American recession Calls on the horizon. The latest warning comes from Deutsche Bank analysts. They announced earlier this week that the US recession would be imminent if the Federal Reserve chooses an aggressive monetary tightening.
Fed under difficult conditions
An unexpected contraction in the US economy will no doubt be on the table at next week’s Federal Reserve interest rate meeting. Fed President Jerome Powell said last week there was a tariff hike 50 Basic Points Probably. Some economists expect the US Federal Reserve Next months Each time it raises the interest rate by 50 basis points.
However, the central bank is now facing a difficult balancing act. It threatens to further shrink the US economy if the regulator tightens policy too aggressively. There is no desire to do nothing. If so, there is a risk that inflation will rise further. James Knightley, an economist at ING, expects the central bank to raise interest rates by 50 basis points next week.
What will the second quarter bring?
The economist is cautious and optimistic about the second quarter. “Although fiscal and monetary policies are less supportive, we expect the growth rate to improve,” it said. “Inflation is affecting purchasing power, nominal incomes are rising sharply and employment has grown significantly, which together will help keep spending down.”
He added that families have saved a lot of money during corona epidemics. According to Knightley, the combination of large capital gains during that period will ensure that consumer spending continues to grow.
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