A surprise fall in GDP in the first quarter makes the US economy look weaker than it actually is given what is likely to be still robust domestic demand. The central bank must maintain the optimistic basic confidence.
In Portland, Oregon, the city is modernizing infrastructure.
Not a pleasant surprise to begin with – the US economy contracted in the first quarter of this year for the first time since the pandemic. US real gross domestic product is down 1.4 percent on an annualized basis compared to 2021. Most experts had expected a comparatively weak but still positive number.
As a closer look at the preliminary figures shows, the change in inventories and, above all, the clearly increasing deficit in the trade balance since the pandemic have made a significant contribution to this development. Weak export demand and inventories together deducted around 4 percentage points from overall growth when calculated. As a result, the traditional growth statistics currently hide the fact that domestic demand from American companies and corporations is still considered to be comparatively robust.
Indeed, real final sales to domestic customers, a measure of domestic demand excluding international trade and inventories, grew 2.6 percent on an annualized basis. That was significantly more than in the fourth quarter of last year. If one believes the statements made by company bosses in the context of the current reporting season, then demand from private households and so corporate investments are still solid.
For this reason, most experts assume that the “weak growth number” will not prevent the American Federal Reserve (Fed) from significantly tightening the monetary policy framework in the coming week. The Fed is expected to raise interest rates by half a percentage point to 1%, as well as announce a series of further interest rate hikes and a rapid reduction in the huge securities holdings on the institution’s balance sheet.
Ultimately, the consensus is that the US economy can easily absorb higher interest rates and return to modest growth in the second quarter and beyond as consumers and businesses continue to spend. In fact, American citizens seem to have had the money in their pockets since the pandemic subsided. They are spending significantly more on services these days than in previous months. A key example is travel: Hotel occupancy has increased compared to January and more people are boarding planes.
However, the recent high inflation rate of 8.5 percent threatens to undermine the basic optimistic confidence in the future. So the Fed is in demand – not least to get President Joe Biden out of the polling low in view of the midterm elections.