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    Economy Shrinks 1.4% in First Quarter, Below Expectations | Economy

    The U.S. economy unexpectedly shrank 1.4% annually in the first quarter, the Commerce Department reported on Thursday, a sharp decline from the fourth quarter and below expectations that wavered between slow and negative growth.

    Economists had forecast a downshift in the pace of growth from the torrid 6.9% annual rate the economy grew at in the final quarter of 2021. Consensus forecasts had put the first quarter number at about 0.6% annualized growth.

    “The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased,” the report said. “Personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased.”

    Both the World Bank and the International Monetary Fund have recently reduced their estimates of the global economy’s growth in 2022, with the IMF cutting its projections from 4.4% to 3.6%. The reason? Russia’s invasion of Ukraine.

    While the U.S. is viewed as more resilient to the effects of the war on global supply chains and energy prices, it is expected to suffer from the Federal Reserve’s cycle of interest rate hikes that began in March.

    Political Cartoons on the Economy

    The Conference Board last week released its Index of Leading Indicators, which showed a small increase for March though that did not reflect the effects of the war. The organization is forecasting 3% growth for the U.S. economy this year.

    Still, the labor market continues to exhibit strength. The number of Americans filing first-time claims for unemployment benefits fell by 5,000 from the revised level of 180,000 last week. The four-week moving average was 179,750, a drop of 2.250 from the prior period.

    And consumer spending and business investment, two important underpinnings of the economy, continue to remain positive.

    Some economists believe the possibility of a recession during the next 12 months is increasing, although most peg it at about 30% or so. Those estimates were issued before the latest reading on GDP.

    “Although the U.S. economy does not appear to be on the cusp of another downturn, the probability of recession next year is not insignificant, in our view,” economists at Wells Fargo wrote on Wednesday.

    “The recent surge in inflation is the underlying cause of our elevated estimate of recession probability,” they added. “The jump in consumer prices has eroded real disposable income ( “purchasing power”) in recent months. Indeed, real disposable income has declined for seven consecutive months.”

    “Consumers have been able to maintain positive rates of real spending by reducing their savings rates,” Wells Fargo said. “But if inflation continues to erode purchasing power, then consumers may eventually decide to retrench.”

    Faron Daugs, founder and CEO of Harrison Wallace Financial Group, says consumers are having to make difficult decisions over their spending priorities as inflation running above 8% is eating into their budgets.

    “Just to buy food, fuel and housing is about $300 a month additional,” he says, “there’s really no end in sight to this.”

    As a result, Daugs says, “I am finding more and more people using fewer streaming services, many are foregoing the next upgrade of their phones.”

    Natixis CIB Managing Director and Chief Economist of the Americas Joe LaVorgna fears the Fed will not be able to engineer the “soft landing” it seeks as it raises interest rates amid a slowing economy.

    “The biggest risk facing investors is a Fed that over tightens in order to quash demand to such an extent that it offsets supply chain inflation for which policymakers have no control over,” he wrote in a note to clients Thursday morning.

    “It is unfortunate that this GDP rate did not meet expectations, but unsurprising as the U.S. economy remains very volatile with geopolitical turbulence from the war in Ukraine, a global supply chain crisis, increasing inflation and the ongoing COVID-19 pandemic,” said Steve Rick, chief economist for CUNA Mutual Group. “All of these factors have shrunk GDP growth rates around the globe.”

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