US GDP just suffered an unexpected contraction, but experts say all the plumbing is still in order

Nobody panics. Suffice it to say that the US economy just contracted at a freezing speed in the first three months of 2022, contracting -0.4% in the first quarter and -1.4% at an annualized rate.

Yes, it’s the weakest quarter since the pandemic, and while the word flabby comes to mind, the good news is that many other practical parts of the US economy are doing quite well.

Employers have added around 600,000 new jobs each month since October and the unemployment rate fell to 3.6% in March, close to its pre-Covid low.

And while the real global economic engine certainly limped off at the start of what’s been a sensationally shitty year so far, the last quarter of 2021 has also been a bottleneck – when US GDP soared 1.7% or 6.9% per year.

The deans of the US Department of Commerce attribute it all to higher imports and lower private inventory investment, exports and that nice government spending.

But they could have just pointed to a stronger US dollar.

keep your pants on

Consumer spending, the largest component of the US economy, rose 0.7% in the first quarter – an annual rate of 2.7% – despite the impact of the Omicron wave of the coronavirus.

This is the first contraction for the American since Covid restarted production in the second quarter of 2020 universe.

Oscar Munoz, macro strategist at TD Securities, says on the positive side that consumer spending and fixed investment accelerated from last quarter.

“This may suggest early signs of normalization of spending preferences under post-COVID reopening, and should contribute to supply chain normalization (although disruptions are likely to continue for some time) “, believes Munoz.

TD Securities really expected a better performance from these reputable US consumers, but says revisions to monthly retail sales estimates were a late hit to the final numbers.

The United States, not as expensive as we thought. Via TD Securities

“As we expected, GDP growth was hurt by large declines in net exports and inventories,” Munoz said. “Indeed, the two items combined reduced overall growth by 4.0 pp.”

So, in summary, US GDP contracted, but the whole thing was actually a lot more rigid than it looked.

Exaggerated concerns

Oscar says core PCE inflation should also start to slow, with the annual change in core PCE prices slipping to 4.1% in the fourth quarter of 2022.

“This confirms our view of a rebound in production in the second quarter as inventory rebuilding normalizes and imports become less of a drag amid still-strong domestic demand.”

And speaking of hoes… the group of governors who double as the Federal Reserve’s political press gang are largely pegged to go with a half-percentage-point raise in Tuesday’s exciting hoedown (I think ) next week.

Impressive Chairman Jerome Powell – overnight, talking about price stability – has promised everyone, everywhere the bank is on the case and committed to raising the cash rate ‘quickly’ to get it under control this absurd inflation as prices in the United States rise to their fastest clip since the rise of Madonna and just back-up dancers as a whole.

Fed Pres Loretta Mester of Cleveland said she’s also okay with a 50 basis point rate hike, even a few times if needed, but wouldn’t just open the floodgates.

She called the upcoming gatherings – where they will tear down the walls of super-accommodative Covid-era monetary settings – “the great recalibration of monetary policy.”

Which is a pretty cool name, for a pretty easy gig.