The US economy contracted in the first three months of the year as restrictions on domestic supply, a shortage of demand abroad and rapid global inflation weighed heavily on an otherwise sustainable recovery.
Inflation-adjusted gross domestic product fell 0.4 percent in the first quarter, the trade ministry said on Thursday. This was the first decline since the first days of the pandemic and a sharp reversal of the rapid growth of 1.7 percent in the last three months of 2021.
But the negative number obscured evidence of a recovery that economists say remains fundamentally strong. The decline – by 1.4% on an annual basis – is mainly due to the way stocks and trade are calculated, as well as reduced government spending as efforts to alleviate Covid-19 are reduced. Measurements of core demand showed solid growth.
Most importantly, consumer spending, the engine of the US economy, rose 0.7% in the first quarter, despite rising gas prices and the Omicron coronavirus wave, which cut spending on restaurants, travel and similar services in January.
“Consumer spending is the mid-ocean aircraft carrier – it’s just moving forward,” said Jay Bryson, chief economist at Wells Fargo.
However, this resilience can be tested in the coming months, as the fastest inflation in four decades continues to have an impact. Consumer prices rose 7% year on year in the first quarter, and US income after inflation-adjusted taxes fell for the fourth consecutive quarter.
The share of Americans who cite inflation as the most significant financial problem of households reached a record high in a Gallup poll published on Thursday. A total of 46% rated their personal finances positively, up from 57% a year ago, when the majority of households had just benefited from federal direct aid.
Despite this bleak outlook, higher prices have not yet reduced consumers’ willingness to spend. But that will change if inflation continues to outpace earnings gains, said Beth Ann Bovino, chief US economist at S&P Global. The level of savings in the first quarter fell below pre-pandemic levels for the first time as consumers saved less to continue spending.
“There is a turning point,” she said. Sometime this year, she added: “I expect to see households start to react, or by trading down, looking for deals, they are less inclined to pay higher prices.
At Melting Pot, a national chain of nearly 100 fondue restaurants, revenue fell in early January as growing coronavirus cases kept both visitors and employees at home. But reservations came back quickly, and Valentine’s Day – “our Super Bowl,” said CEO Bob Johnston – was the strongest in history. Sales this spring increased by 40 percent or more compared to 2019, and growth would be even stronger if franchisees could hire enough people.
Find out inflation in the United States
“We can’t meet the demand,” Mr Johnston said. “We need more members of the team and we are fighting to keep the bench full.
The Melting Pot raises wages to attract workers, and pays more for many ingredients. So far, it has managed to raise prices to offset higher costs without losing business, but Mr Johnston said he did not know how long that would last.
“We are trying to be very careful with this and we are not too sure that we can continue to raise prices without impact,” he said. “There may be a line we can’t see and we don’t want to cross.
Republicans took advantage of rising prices to blow up President Biden’s economic policies. Thursday’s report gave them the opportunity to step up that criticism.
“Accelerating inflation, the workers’ crisis and the growing risk of a significant recession are typical economic failures of the Biden administration,” said Kevin Brady of Texas, a leading Republican in the House of Representatives Committee on Ways and Means.
The White House has tried to reject the decline in gross domestic product as a result of oddities in data that do not reflect the overall strength of the economy.
“While the assessment of last quarter’s growth has been influenced by technical factors, the United States is facing the challenges of Covid-19 around the world, Putin’s unprovoked invasion of Ukraine and global inflation from a position of strength,” Biden said in a statement. after a statement, citing Russian President Vladimir Putin.
In fact, the weakness for the first quarter was partly related to the stability of the US recovery compared to the rest of the world. US retailers responded to consumer demand by importing more. At the same time, US exports are lagging behind due to weaker economic growth abroad. As a result, the trade deficit widened, taking more than three percentage points of the change in gross domestic product in the first quarter.
“The moral of the story is that the Omicron wave, the war in Ukraine and the new blockades in China were more expensive to grow abroad than at home,” said Diane Swank, chief economist at accounting firm Grant Thornton. “Internal costs have been remarkably sustainable. It actually accelerated. “
Slower inventory expansion reduced growth by almost one percentage point. Companies have been vying to stockpile at the end of 2021 to make sure supply chain outages don’t leave them bare on the shelves during the holiday season. This meant that in the new year they did not have to stock up as much as usual.
A key growth measure that offsets the effects of inventories and trade rose 0.6% in the first quarter, adjusted for inflation. This was a modest acceleration from the end of last year.
However, economists have warned not to reject inventory and trade effects altogether. Both reflect the challenges facing local producers in meeting huge consumer demand.
“If we import things instead of producing them here, it reflects that we demand more than we can produce,” said Wendy Edelberg, project director for Hamilton, Brookings Institution’s economic policy unit. “This suggests that our economy simply does not have the capacity to meet demand.
Frequently asked questions about inflation
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What is inflation? Inflation is a loss of purchasing power over time, which means that your dollar will not go as far tomorrow as it does today. It is usually expressed as an annual change in the prices of everyday goods and services such as food, furniture, clothing, transport and toys.
What causes inflation? This may be a result of growing consumer demand. But inflation can also rise and fall on the basis of developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? Depends on the circumstances. Rapid price increases lead to problems, but moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation usually creates problems for stocks. Financial assets generally performed poorly during the inflation boom, while tangible assets such as houses maintained their value better.
The Federal Reserve is trying to curb demand by raising interest rates, which politicians hope will curb inflation. But Russia’s invasion of Ukraine and a new round of blocking Covid in China have complicated its work by prolonging supply disruptions for which the central bank can do little.
Matt Younger, who owns a small construction company in Annapolis, Maryland, handles long delays and higher prices for just about anything that goes into building a house: two by four, plywood, windows, garage doors.
“It’s like playing a game of chess – I have to be a few steps ahead in everything in case I can’t get something,” he said.
Rising interest rates are now threatening to cool the hot real estate market. Mortgage applications have plummeted, sales of new and existing homes have also fallen, and anecdotal evidence from across the country suggests that the insane bidding wars that have plagued the housing market for much of the past two years may begin to fade.
So far, however, none of this has slowed the construction business. Housing construction grew by 0.5% in the first quarter, only slightly slower than in the last quarter of 2021, and applications for building permits rose in March. Mr. Younger’s business is still booming.
Mr Munger said he had stopped offering fixed-price contracts because he could not be sure in advance how much his materials would cost. Ultimately, he suspects that some repair customers will cut back on their projects to fit their budgets. But when it comes to new homes, there is such a shortage of housing in the Washington area that he doubts demand will dry up – and even if sales slow, he can always rent out the homes he builds.
However, up the supply chain, some companies are under pressure.
Marilyn Santiago manages Creative Architectural Resin Products, a Florida-based manufacturer of artificial wood beams, shutters and other decorative elements for homes. Ms. Santiago, like Mr. Jr., has seen the cost of her materials skyrocket in recent months. But she is struggling to pass these increases on to her home builders because they are looking for ways to cut their own costs.
Delays in construction are also wreaking havoc on Ms. Santiago’s business. Its products usually cannot be installed before the windows of the house, and with the joinery ordered back across the country, its warehouse is full of ready-made parts that should have been delivered months ago.
“If you get to my house, you’ll see a bunch of brackets, and my truck is also a warehouse,” she said.
Ms. Santiago is now considering buying a new warehouse, but storage prices have also risen.
“It’s as if everyone is taking advantage of …
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