Businessman Riding a Snail

U.S. economic growth slowed to 1.1 percent in this year’s first quarter, bogged down by business’s reluctance to invest amid stubborn inflation, rising interest rates, and a cloudy economic future, Bloomberg reported.

Also, many retailers are still overstocked with inventory, which cut back on orders for new goods. The lack of investment in inventory subtracted 2.26 percentage points from GDP, Bloomberg said.

The figure shows an “abrupt deceleration” from the previous quarter’s 2.6-percent growth, the Financial Times noted. 

Economists in a Bloomberg survey had expected quarterly growth of 1.9 percent. 

Consumer spending showed a spurt early in the year, rising 3.7 percent from 1 percent in 2022’s final quarter and growing at the fastest pace since the second quarter of 2021. However, spending gained only 0.1 percent in February and flattened in March, The Wall Street Journal reported.

Consumers spent less on merchandise, especially vehicles, while boosting spending on essential services including health care, housing, and utilities, the U.S. commerce department said.

Factory output, home sales, and retail trade all slumped in March, according to the WSJ.

The slowdown indicates the U.S. Federal Reserve has been successful in slowing the economy by raising interest rates to beat back inflation, several analysts said.

“Business investment in equipment posted the biggest drop since the start of the pandemic and inventories subtracted the most from GDP in two years,” Bloomberg noted. Businesses made the smallest investment in intellectual property since the COVID era began.

Although consumer spending grew during the quarter by 3.7 percent, year over year, the personal expenditures consumption index—the U.S. Federal Reserve’s preferred measure of inflation—during the period ran at an average of 4.2 percent, meaning those additional dollars actually bought fewer goods and services than they did in the quarter before. 

Housing sales also slumped under the weight of higher interest rates, down 4.2 percent in the quarter. Business investment in new equipment crumpled by 7.3 percent, the sharpest drop in almost three years.

The jobs market has slowed and unemployment claims, especially among higher-paid workers, are rising, which we detail in “Layoffs Surge Among High-Income Earners” in this issue.

Investors sold U.S. government bonds on news of the quarter’s results, lifting the 10-year treasury note’s yield up by 0.09 percent to 3.52 percent. 

The return on the two-year note, which closely reflects investors’ sentiments about interest rates, went up 0.13 percent and lifted the yield to 4.0 percent. 

Yields rise as demand for bonds falls.

Economists were even more glum about the current quarter, predicting only a 0.2-percent expansion in the U.S. GDP in the same survey. Many foresee a recession beginning in the year’s second half as higher interest rates take a toll on growth.

“Recent data signal that soft economic growth continues into the second quarter,” Kathy Bostjancic, chief economist at Nationwide Mutual Insurance, told Bloomberg. 

“Meanwhile inflation, especially at the core services level remains elevated and sticky—an unfavorable mix of slower growth but still high inflation,” she said. 

TREND FORECAST: An economy with rising prices and shrinking productivity is in the throes of Dragflation, another of our Top 2022 Trends that has proven accurate.

Stubborn inflation, hefty interest rates, tapped-out consumers, and the global economic slowdown all increase the likelihood of a U.S. recession this year.

The chances depend in part on China’s fate. 

Europe has managed to squeak past a recession so far, as we report in “EU Ekes Out Small Growth in First Quarter” in this issue. China’s recovery has lifted Europe’s export economy. If Europe’s economy can stabilize with China’s help, Europe’s demand for U.S. products could increase, perhaps by enough to help the U.S. also skirt an economic downturn.

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