Fri, 22 Sep 2023

WASHINGTON D.C.: Due to the record high trade deficit and a resurgence in COVID-19 infections that curbed spending on services, the U.S. economy contracted slightly more than previously estimated in the first quarter of 2022.

The Commerce Department's report estimating gross domestic product (GDP) was released this week, and also downgraded consumer spending and raised inventory estimates from May.

Amidst fears of recession caused by the Federal Reserve's aggressive monetary policy aimed at curbing inflation, the indicators are a potential red flag for domestic demand and overall economic outlook.

During a European Central Bank conference this week, Fed Chair Jerome Powell said in order to control inflation, "there is a risk" the U.S. central bank could slow the economy more than required.

"The biggest effect from this report is that it leaves inventories in a more overbuilt position than previously thought, putting second-quarter GDP into negative territory, pending what tomorrow's data reveals about May consumption and consumer inflation, and April revisions to the same," said Chris Low, chief economist at FHN Financial in New York, as quoted by Reuters.

In the previous quarter, GDP fell at a 1.6 percent annualized rate, revised down from the 1.5 percent decline reported last month, the first drop in GDP since the pandemic-induced recession began nearly two years ago.

Economists polled by Reuters predicted the pace of contraction would remain unrevised at the 1.5 percent rate.

The economy was initially estimated to have contracted at 1.4 percent, but it grew by a 6.9 percent pace in the fourth quarter, while GDP was 2.7 percent higher than in the fourth quarter of 2019.

Consumer spending, which accounts for more than two-thirds of the economy, grew at 1.8 percent, instead of the 3.1 percent reported last month.

Meanwhile, the U.S. dollar rose against various currencies, as U.S. Treasury yields fell, and stocks on Wall Street were mostly lower.

Slower consumer spending was partially offset by stronger business investment in equipment, rising to 14.1 percent from 13.2 percent.

But interest on assets have declined, leading to the rise in gross domestic income (GDI), an alternative measure of economic growth, being pared to 1.8 percent rate from the 2.1 percent pace predicted last month. GDI advanced at a 6.3 percent rate in the fourth quarter.

However, after consumer spending rose in April, the economy seems to have recovered from the first-quarter slump, but this upturn is losing momentum due to the Fed's aggressive anti-inflation policies.

Additionally, retail sales fell in May, while housing starts and building permits declined, and consumer confidence hit a 16-month low in June.

"It is extremely unlikely the economy is in recession nowdespite the decline in first-quarter GDP and apparent weakness in output growth in the current quarter," said Scott Hoyt, a senior economist at Moody's Analytics, as quoted by Reuters.

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