Is a recession on the horizon two years after suffering a sharp but brief economic decline? The United States economy is one quarter away from slipping into a downturn. In the first quarter, the gross domestic product (GDP) contracted 1.4%, worse than the median estimate of 1.1% growth. While a negative base case was not out of the realm of possibility, most market experts anticipated a stagnant nation in the middle of rampant price inflation, the war in Eastern Europe, and supply chain snafus. Will the White House blame it on President Vladimir Putin, as it does for everything else?
Inside the Q1 GDP Report
The unexpected contraction in the GDP was driven by a decline in exports, private inventory investments, and federal, state, and local government spending. Imports and residential and non-residential fixed investment rose in the three months ending in March.
The GDP price index advanced 8% in the January-March period, while GDP sales fell 0.6% to kick off 2022. Personal consumption expenditure (PCE) prices surged 7%, and core PCE prices picked up 5.2%.
Current-dollar personal income surged to $268 billion in the first quarter, up from $123.9 billion in the fourth quarter. Disposable personal income advanced 4.8% to $216.6 billion, but real disposable personal income tumbled 2%. The personal savings rate fell to 6.6%, or $1.21 trillion.
Financial markets dismissed the abysmal GDP snapshot in pre-market trading. The Dow Jones Industrial Average climbed 0.75%, the Nasdaq Composite Index jumped 1.7%, and the S&P 500 rallied 1.3%. The US Treasury market surged across the board, with the benchmark 10-year yield up 0.064% to 2.882%. The US Dollar Index (DXY), which gauges the buck against a basket of currencies, spiked 0.74% to 103.71, from an opening of 103.04 – the DXY has rallied more than 8% year-to-date.
The next Q1 estimate will be released at the end of next month, which should provide a greater indication of how the post-crisis economy is performing with more complete data.
What Now?
In the coming weeks, Wall Street estimates about the economy should be riveting. Goldman Sachs has increased the odds of a recession to 35%, while Deutsche Bank warned that a “significant recession” could slam into the economy late next year. Some market analysts have referenced a “growth recession,” which means economic expansion below the long-term average of 1.5% to 2%. Others, including Nick Reece, a portfolio manager at Merk Investments, anticipate a “more garden-variety downturn,” suggesting that growth would be subdued or contraction would be tepid.
Either way, four-decade-high inflation was bound to weigh on the broader economy. Consumers are spending less, while households are eating into their savings to cover the cost-of-living crisis. The global supply chain crisis is not abating, with traffic volumes, backlogs, and delays immense and widespread. The Russia-Ukraine military conflict has also added to inflationary pressures, supply chain hiccups, and disruptions to commodity production, from fertilizer shortages to greater transportation costs.
Moreover, it looks increasingly likely that the Federal Reserve’s goal of a soft landing – curbing inflation while avoiding a GDP decline – is going to metastasize into a crash. The Eccles Building has supported an economy on training wheels, and each time it slowly unscrews the nuts and buts, the nation teeters on the brink of stagnation or contraction. It makes sense why financial markets are penciling in an interest rate cut sometime in the second half of 2023 to reverse the slump. All eyes will be on the minutes from the May Federal Open Market Committee (FOMC), where it is almost certain the central bank will pull the trigger on a 50-basis-point rate hike.
Should these economic snapshots point to a rough landscape over the next several months, the White House messaging heading into the mid-term elections will be knee-slapping entertainment. President Joe Biden and his administration have routinely abandoned any culpability regarding today’s plethora of problems, from sky-high energy prices to the broad inflationary fiasco. Indeed, if a recession strikes, be prepared for US officials to proclaim it to be “Putin’s recession.”
