US: Economy shows a surprising contraction

In this week's prominent first-tier economic data, Gross Domestic Product fell 1.4% year-on-year after 6.9% growth at the end of 2021. Economists' median forecast was for a 1% increase. This figure will be revised two more times with the forecasts for the following months and the final GDP statement...

In this week's prominent first-tier economic data, Gross Domestic Product fell 1.4% year-on-year after 6.9% growth at the end of 2021. Economists' median forecast was for a 1% increase. This figure will be revised two more times with the forecasts for the following months and the final GDP statement. Thus, the US economy unexpectedly shrank, recording its first contraction since 2020. The momentum carried into late 1Q22 and 2Q22 is critical as COVID-19 restrictions are eased and the Ukraine war has mixed effects on growth, and geopolitical dynamics underline some downside risks to growth.

 

If we look at the sub-items; net exports and inventories fell nearly 4 percentage points from headline growth. Government spending also contracted, putting pressure on GDP. Still, actual final sales to local buyers, a measure of underlying demand that excludes the trade and inventory components of GDP, rose 2.6% year-on-year, an improvement from the 1.7% pace in the fourth quarter. Personal consumption, the largest part of the economy, rose 2.7% year-on-year in the first quarter compared to 2.5% at the end of 2021. As infection rates decline and restrictions ease, consumers are turning from spending on goods to services. Russia's invasion of Ukraine led to a spike in gasoline prices, and high inflation discouraged price-sensitive consumers from spending on discretionary durable goods categories.

 

The housing market is showing signs of cooling: Demand is strong, but record-high home prices coupled with a rapid rise in mortgage rates have reduced affordability. Sales of existing homes fell in the first quarter, although new home sales, a much smaller market, rose moderately in the first two months. Business investment in equipment accelerated sharply. Despite that; The war in Ukraine poses risks to supply chains and demand. Low sales-to-stock ratios will continue to support production as firms replenish stocks and contribute to growth.

 

Headline data is definitely negative… Recent data point to a weaker performance in the months just before Russia's invasion of Ukraine. Earlier this year, spending increased as cases of Covid-19 dwindled. As the quarter got longer, high inflation began to reduce purchasing power. Of course, the overall operating pressure of the Omicron variant in 1Q22 will also need to be taken into account. Among the increasingly uncertain conditions, we have to monitor the extent of the slowdown as of the fourth quarter of 2021. Excluding war dynamics, only the relief of omicron-related conditions and the decline from volatile stocks and trade will be temporary. Growth is likely to reach the projected path in the next quarters of the year, and the Fed expects 2.8% GDP growth for this year.

 

In an environment of faster inflation, the Fed will advance the phase of tightening monetary policy with a half-point increase in interest rates next week. In the last few days, after 50bps pricing was completed, FOMC's Bullard's 75bps guidance also included marginal probabilities. As inflation continues on its uptrend and coronavirus restraints are relaxed (the first quarter slowdown will be largely attributed to coronavirus restraints), the Fed is not in a position to bounce back from monetary tightening at this stage. Even if the central bank will reduce the level of tightening, it will consider this at a later stage while higher interest rates apply.

Kaynak Tera Yatırım
Hibya Haber Ajansı

28 Nis 2022 - 18:03 - Dünya



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