The US economy shrank surprisingly in the first quarter of the current year. As the government in Washington announced on Thursday, the gross domestic product (GDP) from January to March, extrapolated for the year as a whole, fell by 1.4 percent. Experts, on the other hand, had expected growth of around one percent. In the final quarter of 2021, GDP had increased by 6.9 percent.
The Office for Economic Analysis justified the development, among other things, with the resurgence of the corona pandemic in the USA, a decline in government aid and falling inventories and exports. This could not be offset by increased consumer spending and higher investments. The Russian invasion of Ukraine and the outbreak of the Omikron variant in China, which led to production downtime and delivery stops for important primary products from the People’s Republic, may also have played a role.
The unexpected decline in GDP not only fuels fears that the US economy will slip into recession, it also makes the already difficult task of the Federal Reserve (Fed) even more complicated recently reached 8.5 percent, its highest value in 40 years and is increasingly becoming an economic risk. At the same time, however, she has to fear that the many crises in the world will continue to dampen economic growth in the USA. If the Fed raises interest rates too quickly or too drastically in this situation, it may choke off the upswing completely or even trigger the next recession. The result could be so-called stagflation, i.e. a combination of shrinking economic output and sharply rising prices at the same time – a nightmare scenario for every central banker.
Whether the Fed will raise interest rates on Wednesday is now open again
Until this Thursday, Fed Chair Jerome Powell and his colleagues had assumed that the inflation rate was the bigger risk. Virtually all experts have therefore expected that the monetary policy committee of the central bank will raise its key interest rate, the so-called overnight target range, by half a point to 0.75 to 1 percent at the regular meeting next Tuesday and Wednesday. At the end of the year, so it is expected, after two years of zero interest rates, the upper limit of the corridor could even be back in “neutral territory” between 2 and 2.5 percent – i.e. at a level at which the central bankers are convinced that economic development will neither be artificially fueled nor slowed down will.
Now that the GDP figures have been published, it is once again completely uncertain whether the course that leading representatives of the Fed themselves have indicated can be maintained. The central bankers can only be encouraged by the increase in consumer spending and the higher capital investments by companies, which indicate that the economy is still on a very stable footing. In addition, there is a more mathematical effect that falsifies the quarterly report a bit: the GDP figure at the beginning of the year was so bad because the comparative value for the previous quarter had been artificially inflated by official statistics. As the significant increase in inventories shows, especially in December, many companies increased production significantly in the final months of last year, but were by no means able to actually sell all of the goods to end customers. Many goods ended up in the depots instead.
Between January and March, things tended to be the other way around: part of the still quite stable US consumption was not satisfied by current production, but by products that the companies still had in stock. Or to put it another way: the official GDP growth rate in the final quarter of 2021 overstated the actual situation, while the figure for the first three months of 2022 understates it a little.