U.S. economy shrank by 1.4 percent in Q1 but consumers kept spending

The U.S. economy shrank last quarter for the first time since the pandemic recession struck two years ago, contracting at a 1.4 percent annual rate, but consumers and businesses kept spending in a sign of underlying resilience.

The steady spending suggested that the economy could keep expanding this year even though the Federal Reserve plans to raise rates aggressively to fight the inflation surge. The first quarter’s growth was hampered mainly by a slower restocking of goods in stores and warehouses and by a sharp drop in exports.

The Commerce Department’s estimate Thursday of the first quarter’s gross domestic product — the nation’s total output of goods and services — fell far below the 6.9 percent annual growth in the fourth quarter of 2021. And for 2021 as a whole, the economy grew 5.7 percent, the highest calendar-year expansion since 1984.

The economy is facing pressures that have heightened worries about its fundamental health and raised concerns about a possible recession. Inflation is squeezing households as gas and food prices spike, borrowing costs mount and the global economy is rattled by Russia’s invasion of Ukraine and China’s Covid lockdowns.

Still, the U.S. job market — the most important pillar of the economy — remains robust. And in the January-March quarter, businesses and consumers increased their spending at a 3.7 percent annual rate after adjusting for inflation.

Economists consider that trend a better gauge than overall GDP of the economy’s underlying strength. Most analysts expect the steady pace of spending to sustain the economy’s growth, though the outlook remains highly uncertain.

Last quarter’s slowdown followed vigorous growth in the final quarter of 2021, driven by a surge in inventories as companies restocked in anticipation of holiday season spending. Businesses did continue rebuilding inventories last quarter, but they did so more slowly, hindering growth in the process.

Imports also surged in the January-March quarter as businesses and consumers bought more goods from abroad while U.S. exports rose more slowly. That disparity widened the trade deficit and subtracted from the quarter’s growth.

The weakness of the economy’s overall growth rate contrasts with the vitality of the job market. At 3.6 percent, the unemployment rate is nearly back to the half-century low it reached just before the pandemic. Layoffs have reached historically low levels as employers, plagued by labor shortages, have held tightly onto their workers.

Wages are rising steadily as companies compete to attract and retain workers, a trend that has helped maintain consumers’ ability to spend. At the same time, though, that spending has helped fuel inflation, which reached 8.5 percent in March compared with 12 months earlier.

Fed Chair Jerome Powell has signaled a rapid series of rate increases to combat higher prices. The Fed is set to raise its key short-term rate by a half-percentage point next week, the first hike that large since 2000. At least two more half-point increases — twice the more typical quarter-point hike — are expected at subsequent Fed meetings. They would amount to one of the fastest series of Fed rate hikes in decades.

Powell is betting that with job openings at near-record levels, consumer spending healthy and unemployment unusually low, the Fed can slow the economy enough to tame inflation without causing a recession. Yet most economists are skeptical that the Fed can achieve that goal with inflation as high as it is.

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  • 3 дня, 3 часа назад 26.05.2022Economy
    RIP Davos Man, long live globalization

    DAVOS, Switzerland — Globalization isn’t over, it’s just outgrowing the World Economic Forum.

    Once upon a time globalization was mostly about economics: intensifying trade, falling tariffs, outsourcing and the rise of multinational brands.

    It was Western-led, financialized and championed by global institutions like the World Trade Organization — and assumed. In the glory days of the post-Cold War world, this was the good and natural order of things according to the CEOs and political leaders that mingle at the World Economic Forum.

    No longer. Today political risk is multiplying and power is decentralizing, changing globalization with it.

    These tensions were on full display in Davos this week.

    The town’s promenade was dominated by crypto businesses with little interest in the official conference program. Ukraine-themed spaces dotted the town, where a beamed-in President Volodymyr Zelenskyy was a bigger draw than any of the political minnows on WEF’s main stage. Governments may be struggling to pay down pandemic debt and buttress inflation pain, but good luck finding a WEF panel about equitable taxation policy, despite cries from NGOs.

    These multiple versions of Davos talked across each other instead of pulling in one free market direction.

    Where once it was manufacturing supply chains that were globalized, now it’s more often rules and regulations — from ending corporate tax loopholes to mandating a carbon-neutral future.

    “Our concept of risk has expanded,” said Arancha González, the former executive director of the U.N.’s International Trade Centre, and a former foreign minister of Spain. “The rules part will be as important as opening markets. It’s no longer a case of opening markets and thinking it will all work out. It will not.”

    Those risks stretch from the ongoing global pandemic that has set the world’s agenda for the last two years to a global food crisis that now threatens mass famine.

    And it is digital technologies more than finance that powers what is globalized today — everything from terror, hate and misinformation to the proliferation of new cryptocurrencies and streaming services.

    Sure, there’s fretting about cracks in the global economy induced by Covid lockdowns and Russia’s war in Ukraine: a new Accenture study found that supply chain disruption could cost Eurozone economies more than $1 trillion this year, up to 7.7 percent of GDP.

    There’s also a real risk that parts of globalization stall or go backwards long-term, delivering a world split into democratic and authoritarian political blocs, riven with sanctions and tariffs and powered by regional internets.

    González is confident that globalization, though changing, will continue because a world beset by global challenges needs cooperative frameworks. “I don’t see a reduction in interconnection. For me globalization is interconnection, and that is increasing, not reducing,” she said.

    Former Danish Prime Minister Helle Thorning Schmidt agrees. “We have to find a way to work with China. We [in democracies] have to find ways of working with countries that don’t fully share our values,” she said.

    While political fears about China are rising in democracies, there’s no widespread momentum to substantially alter trade relations based on human rights or intellectual property concerns.

    U.K. Trade Secretary Anne-Marie Trevelyan told POLITICO she would continue to raise concerns, but said “we have a very substantial bilateral trade relationship with China, and our businesses want to continue to grow that.”

    While Western governments worry about energy supply chains and the rise of China, that’s not top of mind for the rest of the world, which often feels marginalized in Davos.

    “For most of Asia, China becoming number one is a given: a return to the natural state of 1,800 of the past 2,000 years,” said Kishore Mahbubani, a distinguished fellow at the National University of Singapore’s Asia Research Institute and an open admirer of the Chinese Communist Party. “Most of the region is trying to integrate with China,” he said.

    For Mahbubani, it’s clear that the “U.S. has decided to try to stop China becoming number one.” But the real risk from that is not that globalization will halt, but rather American self-sabotage. “If the U.S. tries to decouple from China, it will decouple from most of the region,” he said.

    Columbia University’s Adam Tooze rejected the idea that globalization is ending. “It’s B.S. Ending globalization? Life as we know it would cease to exist,” he told POLITICO. “When people say this, they’re either naive or apocalyptic,” he said, adding “it’s a bad way of thinking about the problem.”

    Tooze expects “a reconfiguration of globalization, a rearrangement, and politicization in certain respects of certain relationships.”

    Alexander Stubb, the peppy former prime minister of Finland who now leads the European University Institute’s School of Transnational Governance, warns of a complicated future. “It’s too simplistic to say we’re moving towards some kind of a new Cold War, with a liberal world order and an authoritarian world order,” he said. “I think we’ll have more regionalization of globalization, but it’s not going to go away.”

    Instead, the West will need to adjust: “If we want to work for a rules-based order, it’s not necessarily going to be us setting the rules anymore.”

    The bigger risk to globalization may come from the rising expectations that democratic governments and the businesses that call these countries home should cut ties with unsavory regimes.

    A special Edelman Trust Barometer report published Monday found that businesses are now subject to extensive geopolitical demands: 95 percent of respondents said that they expect companies to act in response to Russia’s unprovoked invasion by publicly speaking out, applying political and economic pressure or exiting the aggressor country’s market.

    “When businesses shut down in Russia they were not making that decision about Russia alone,” said Microsoft’s president, Brad Smith, who argues that withdrawal from Russia was a message to all authoritarian regimes, and an implicit acknowledgment that they may be forced to withdraw from other markets.

    The WEF itself was forced to freeze its relations with Russian organizations and executives in March, under political pressure and to avoid litigation over breaking sanctions.

    As with other large global businesses, WEF must now confront difficult questions about where it draws its moral lines. Traditionally, autocrats have been welcomed with open arms in Davos. This week, the love extended to Cambodia’s Hun Sen and Zimbabwe’s Emmerson Mnangagwa.

    But the days of believing that conversation and open markets lead to democratization are over.

    We know now that global economic ties don’t lead to political relaxation. And, like everyone else, the self-anointed high priests of globalization can’t avoid this redrawing of the global order.

    The real question isn’t whether globalization will carry on, but whether a markets-first and Western-centric WEF can evolve with it.

    Suzanne Lynch and Jamil Anderlini contributed to this report.

  • 3 дня, 3 часа назад 26.05.2022Economy
    News The Buckshee

    What a difference five years makes. Davos has gone from debating China’s seemingly indomitable rise to fretting about its weakness.

    When Chinese President Xi Jinping took the stage at the World Economic Forum in 2017, he was the man of the moment.

    Standing at the podium in the exclusive Swiss resort town for the first time, Xi mapped out China’s muscular economic gameplan — just three days before Donald Trump was inaugurated as U.S. president, vowing to pursue an isolationist, America-First approach. In his speech, Xi paraded China’s supposed embrace of a globalizing, multilateral model. “One should not select or bend rules as he sees fit,” Xi said, winning applause from his audience of the super-powerful and super-rich, who knew exactly which rule-bender he was referring to.

    This time round, Xi, who has not left China since the coronavirus pandemic erupted two-and-a-half years ago, did not even dial in for a Zoom call.

    For the cohorts of corporate titans and policymakers traveling to Davos to read the runes on whether the next recession is just about to break, his absence was ominous. The conversation has shifted dramatically from wary appraisals of China’s strength to borderline panic about its fragility.

    Xi’s heavy-handed “Zero COVID” strategy has triggered serious discomfort among Western businesses. The Economist Intelligence Unit estimates the lockdown stands to chomp an annualized aggregate of 6 percent off Shanghai’s economic output, plunging China’s leading port city into recession and causing Beijing to undershoot its overall gross domestic product target.

    Those kinds of numbers are setting off tremors worldwide.

    It fell to philanthropist George Soros — the ultimate Davos stalwart — to sum up the scale of what he slammed as “Xi’s worst mistake.”

    “The lockdowns had disastrous consequences,” he said. “They pushed the Chinese economy into a free fall. It started in March, and it will continue to gather momentum until Xi reverses course — which he will never do because he can’t admit a mistake. Coming on top of the real estate crisis, the damage will be so great that it will affect the global economy. With the disruption of supply chains, global inflation is liable to turn into global depression.”

    In another sign of souring sentiment, David Rubenstein, co-founder of the private equity Carlyle Group, told POLITICO in Davos that “India has been more attractive [to buy assets] of late than China.”

    China admittedly has reasons beyond the coronavirus to keep its head down this year. Beijing knows full well it is no longer the flavor of the month because of Russia’s invasion of Ukraine. Indeed, Davos assumed an unusual “War and Peace” vibe this year, with a keynote speech from Ukraine’s President Volodymyr Zelenskyy. Thanks to China’s logically tortured position of “pro-Russia neutrality,” which won little support in the crowd, Xi’s hardly the most welcome guest anymore.

    Playing to perhaps its only strength given the current mood, Beijing’s official delegation was headed by the most apolitical figure imaginable: the veteran climate envoy Xie Zhenhua. The message is clear: Let’s set aside disputes over coronavirus and security for the time being, and focus on the only issue on which the West is still genuinely interested to engage with China.

    For Soros, though, Russian President Vladimir Putin and Xi Jinping were now united by stubbornly clinging to their errors. “They rule by intimidation, and as a consequence they make mind-boggling mistakes. Putin expected to be welcomed in Ukraine as a liberator; Xi Jinping is sticking to a Zero Covid policy that can’t possibly be sustained.”

    From China, the economic signals are dire. Just as the chief executives and ministers were clinking glasses by the Alps, China’s Prime Minister Li Keqiang was in emergency mode. Fears in the West are shifting from annoyance over subsidy-fuelled overproduction of everything from plastic toys to steel, to a more basic concern that supply chains are ruptured and the world’s factory is off the grid.

    On Wednesday, China’s State Council, headed by Li, organized an “unprecedented” phone conference with 100,000 participants from across the country, at all levels of the bureaucracy.

    There’s a single focus: To stabilize the economy. At the meeting, Li stressed the need for stability in “market entities, employment and people’s livelihood” and to keep the economy afloat wherever possible, state media reported.

    “Since March, and especially April. some economic indices are particularly worsening. In some ways, and to a certain extent, the difficulty [we are facing] is bigger than that during the serious hit during the 2020 pandemic,” Li said, a day after the State Council rolled out a 33-point plan to get the economy back on track.

    Stephen A. Orlins, president of the New York-based National Committee on U.S.-China Relations, noted: “The Chinese economy is in considerable difficulty. Nobody has a crystal ball but if the zero-tolerance COVID policy stays in effect, and if COVID continues to pop up, the Chinese economy may contract in 2022. For a country that’s experienced 40-plus years of growth, this is a shock.”

    Li’s say on economics is unusual. For much of his presidency, Xi has taken on most of the economic powers traditionally accorded to the prime minister, rolling out nationalistic policies that focused on clamping down the Big Tech and other innovative sectors. When the crisis hit, however, he took a step back and put Li upfront as the fixer, while the Communist Party prepares for the once-every-five-year congress that is likely to see Xi take the helm for the third time.

    Foreign businesses are unsure about how to cope without a market that used to be their irreplaceable profit engine.

    “While our surveys find that there is broad pessimism among CEOs across the regions of the U.S., China and Europe, CEOs of Western multinationals in China are recorded as being the most pessimistic about current business conditions,” said David Hoffman, senior vice president of The Conference Board, an international economic-research body financed by donations from large corporations.

    “Unexpected, sporadic and widespread COVID-19 lockdowns across numerous Chinese cities, most prolifically Shanghai, and the logistics, people and production havoc these so-called Zero COVID policies have wreaked across the commercial sphere have clearly taken their toll on business sentiment in the region,” Hoffman said.

    Whether the future looks rosier or gloomier depends on whom you ask. For Hoffman, the CEO survey shows that there’s a general sense of long-term optimism, with “only 17 percent of the China group say they’re diversifying away from Chinese suppliers,” suggesting “there’s more coupling than decoupling happening.”

    Siva Yam, president of the Chicago-based U.S.-China Chamber of Commerce, also noted a divergence in sentiment between different sectors.

    “You do see negative sentiment because of the supply chain interruptions. For big business … you are not going to see a lot of new investment because China is not as competitive and you have increasing regulation. For small to medium sized companies that have a niche product that they can sell to China, they continue to be bullish … [because] they are not so impacted by [new] regulations,” he said.

    But Jeremy Farrar, director of the Wellcome Trust, a foundation, was more broadly skeptical of China’s outlook because of the pandemic management.

    Calling China “a great unknown,” Farrar told POLITICO: “I don’t believe a Zero COVID policy is sustainable, and at some point, China will go through a big epidemic. And the population in China has a very different immunity to the rest of the world.”

    “So that’s a big concern.”

    Speaking at a panel co-sponsored by POLITICO, Stéphane Bancel, chief executive of vaccine-maker Moderna, added: “Like Jeremy, I worry a lot about China. Because I think as the virus becomes more and more infectious it is less controllable with techniques that were wonderful in 2020 to prevent a lot of deaths.”

    Xi’s absence and his Zero COVID strategy are all the more galling given his no-holds-barred commitment to globalization back in his 2017 script in Davos.

    “Whether you like it or not,” the Chinese leader said back then, “the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries and people between economies and channel the waters in the ocean back into isolated lakes and creeks is simply not possible.”

    Lofty sentiments, perhaps, but China itself is now the one seeking to be the island, jutting clear of that big ocean.

    Sarah Wheaton, Matt Kaminski and Jamil Anderlini contributed reporting.

  • 6 дней, 11 часов назад 22.05.2022Economy
    U.S. economy is in a ‘period of transition,’ White House economic adviser says

    National Economic Council Director Brian Deese said Sunday that the high inflation rates across the country are a result of the economy’s “period of transition” in recovering from the pandemic.

    “We’re moving from the strongest economic recovery in modern history to what can be a period of more stable and resilient growth,” he said on “Fox News Sunday.”

    And although talk of a recession gained traction in recent weeks, Deese said that Americans hit with higher costs — at the pump or at the grocery store or elsewhere — should “take confidence that [the U.S. is] better positioned than any other country to navigate through this and keep our recovery going.”

    Ongoing inflation — the highest America has seen since the 1980s — has not only hit many American consumers hard but also put a damper on the political fortunes of President Joe Biden, whom some have portrayed as tone-deaf on economic issues. A CBS News poll released Sunday, in which 69 percent of those surveyed thought the economy was either “fairly bad” or “very bad,” put Biden’s disapproval rate at 56 percent.

    Deese also outlined some of the steps in the White House’s playbook to tackle inflation.

    “We need to give the Federal Reserve the independence to do what it does. It has the tools to combat inflation,” he said.

    “Second, we need to reduce costs and make things more affordable for families during this period. Steps that we can take to reduce the cost of the internet bills that families pay or the prescription drug prices that they pay are really important right now.”

    Another part of the plan is working to bring down the federal deficit, he said.

    “If we can do all of those things, then we can build on the historic strengths we have here in the U.S. economy and we can navigate through to more stable growth that will generate better outcomes for families,” he said.

  • 2 недели, 3 дня назад 11.05.2022Economy
    U.S. inflation hit 8.3% last month but slows from 40-year high

    Inflation slowed in April after seven months of relentless gains, a tentative sign that price increases may be peaking while still imposing a financial strain on American households.

    Consumer prices jumped 8.3% last month from 12 months earlier, the Labor Department said Wednesday. That was below the 8.5% year-over-year surge in March, which was the highest rate since 1981.

    On a month-to-month basis, prices rose 0.3% from March to April, a still-elevated rate but the smallest increase in eight months. Consumer prices had spiked 1.2% from February to March, mostly because of a sudden jump in gas prices triggered by Russia’s invasion of Ukraine.

    Nationally, the price of a gallon of regular gas has reached a record $4.40, according to AAA, though that figure isn’t adjusted for inflation. The high price of oil is the main factor. A barrel of U.S. benchmark crude sold for around $100 a barrel Tuesday. Gas had fallen to about $4.10 a gallon in April, after reaching $4.32 in March.

    Beyond the financial strain for households, inflation is posing a serious political problem for President Joe Biden and congressional Democrats in the midterm election season, with Republicans arguing that Biden’s $1.9 trillion financial support package last March overheated the economy by flooding it with stimulus checks, enhanced unemployment aid and child tax credit payments.

    On Tuesday, Biden sought to take the initiative and declared inflation “the No. 1 problem facing families today” and “my top domestic priority.”

    Biden blamed chronic supply chain snarls related to the swift economic rebound from the pandemic, as well as Russia’s invasion of Ukraine, for igniting inflation. He said his administration will help ease price increases by shrinking the government’s budget deficit and by fostering competition in industries, like meatpacking, that are dominated by a few industry giants.

    Still, new disruptions overseas or other unforeseen problems could always send U.S. inflation back up to new highs. If the European Union decides, for example, to cut off Russian oil, gas prices in the United States would likely accelerate. China’s Covid lockdowns are worsening supply problems and hurting growth in the world’s second-biggest economy.

    Previous signs that U.S. inflation might be peaking didn’t last. Price increases decelerated last August and September, suggesting at the time that higher inflation might be temporary, as many economists — and officials at the Federal Reserve — had suggested. But prices shot up again in October, prompting Fed Chair Jerome Powell to start shifting policy toward higher rates.

    This time, though, several factors are pointing to an inflation peak. Natural gas prices, which soared in March after Russia’s invasion of Ukraine, fell on average in April and likely slowed inflation. Used car prices are also expected to have dropped last month. Automakers’ supply chains have unraveled a bit, and new car sales have risen.

    While food and energy have endured some the worst price spikes of the past year, analysts often monitor the core figure to get a sense of underlying inflation. Core inflation also typically rises more slowly than the overall price increases and can take longer to decline. Rents, for example, are rising at a historically fast pace, and there is little sign of that trend reversing anytime soon.

    The unexpected persistence of high inflation has caused the Fed to embark on what may become its fastest series of interest rate increases in 33 years. Last week, the Fed raised its benchmark short-term rate by a half-point, its steepest increase in two decades. And Powell signaled that more such sharp rate hikes are coming.

    The Powell Fed is seeking to pull off the notoriously difficult — and risky — task of cooling the economy enough to slow inflation without causing a recession. Economists say such an outcome is possible but unlikely with inflation this high.

    In the meantime, by some measures Americans’ wages are rising at the fastest pace in 20 years. Their higher pay enables more people to at least partly keep up with higher prices. But employers typically respond by charging customers more to cover their higher labor costs, which, in turn, heightens inflationary pressures.

    Last Friday’s jobs report for April included data on hourly pay that suggested that wage gains were slowing, which, if it continues, could help ease inflation this year.

  • 3 недели, 3 дня назад 04.05.2022Economy
    News The Buckshee

    For more than a decade, the Federal Reserve has kept interest rates at historic lows and gone to extraordinary lengths to help markets survive a financial meltdown and then a pandemic.

    Now, it’s pulling back, and Wall Street is entering a new world.

    At a meeting on Wednesday, the Fed announced a supersized increase in interest rates and laid out plans to shrink its massive bond holdings starting on June 1, in a bid to put the brakes on the economy and kill the highest inflation since the Reagan administration. But the central bank, which said in a statement that it’s “highly attentive to inflation risks,” won’t stop there.

    Rates this year could reach their highest levels since before the 2008 Wall Street crash if surging prices continue. That prospect has sent stocks sliding this year and pushed mortgage rates above 5 percent for the first time in a decade. Investors are nervously waiting to hear how aggressively Fed Chair Jerome Powell expects to lift borrowing costs for the rest of 2022, a move that raises the odds of the U.S. tipping into recession during an election year.

    “I have no doubt the Fed is going to achieve its inflation objective over the next two or three years,” said Gus Faucher, chief economist at PNC Financial, the nation’s ninth-largest bank. “We may not like the result.”

    The Fed’s rate hike campaign marks a new epoch for the economy. The central bank’s easy money policies over the years have enriched many Americans by helping to send stock prices into the stratosphere, boosted home valuations to a record-shattering $43 trillion, and given ordinary consumers extra cash to spend via lower borrowing costs and home refinancings.

    The end of those good times has already shaken consumer confidence and soured the public on the Biden administration’s stewardship of the economy, putting an uncomfortable spotlight on the unelected Fed policymakers ahead of the congressional midterms as they shift into inflation-fighting mode. Republican Fed critics — and some prominent Democrats — have even blamed the central bank itself for allowing inflation to go unchecked for so long.

    “The Fed just doesn’t like doing something like this is in an election year,” said Charles Calomiris, a professor at Columbia Business School who served as chief economist at a key bank regulatory agency under former President Donald Trump. “It’s very awkward.”

    It’s not yet clear how far the Fed will go. The central bank still sees the possibility that inflation could cool on its own as supply chain bottlenecks ease and congressional spending fades. In the best-case scenario, the Fed could increase rates from their ultra-low levels without needing to go much further and restricting the economy.

    But professional forecasters generally expect the central bank to have to dent growth more forcefully than that to bring down spending and ultimately inflation. Some economists estimate that the Fed will have to crank up rates much higher than they currently project to even get to a place where they’re not themselves contributing to price spikes.

    “The Fed missed its chance to tighten without a recession,” Calomiris said. “The longer they delay and pretend they might still have that chance, the more severe they’re going to make it.”

    After four decades where the Fed’s main borrowing rate almost never dropped below 2.5 percent, the economy has now seen more than a dozen years when it has never gone higher than that point. After Wednesday’s move, the rate sits between 0.75 percent and 1 percent.

    Now the central bank is expected to keep ramping up borrowing costs at each of its rate-setting meetings, which occur roughly every six weeks, for the rest of the year. It will also be watching for signs that it’s hitting the brakes too hard.

    Fears of a Fed-induced recession in 2023 have grown, particularly when mixed with the economic fallout from Russia’s invasion of Ukraine and renewed lockdowns in China, both of which the central bank acknowledged in its announcement would likely make supply chain problems worse. But some Fed watchers are hoping that it will be able to slow the economy without leading to a full-on contraction.

    “It is too soon to say that we have to have a recession,” said Krishna Guha, vice chair at Evercore ISI and a former official at the New York Fed. But the process won’t be gentle regardless, he added. “When we talk about a soft landing, we don’t really mean a super soft landing. We mean a bumpy normalization.”

  • 1 месяц назад 28.04.2022Economy
    News The Buckshee

    The contraction of the U.S. economy in the first quarter may be more of a political than an economic problem for the White House: The negative news disrupts the administration’s narrative that growth is healthy despite decades-high inflation.

    Gross domestic product shrank at a 1.4 percent annual rate as strong demand drew a flood of imports, the Commerce Department said Thursday, well below the 1 percent growth that economists had expected. It marked the first quarterly decline in activity since the spring of 2020, when pandemic-related shutdowns triggered mass layoffs that plunged the economy into a brief but deep recession.

    The surprise presents a major messaging challenge for a White House that is grappling with waning consumer confidence, despite months of strong job gains, rapid wage increases and declining layoffs. It comes after GDP grew at a blistering 6.9 percent pace in the last three months of 2021 — and less than a week before the Federal Reserve is expected to accelerate its efforts to raise interest rates to curb inflation, which may further slow growth.

    In the latest Gallup poll released Wednesday, 4 in 5 adults rated current economic conditions as only fair or poor, and more than three-quarters of Americans say the economy is getting worse. The resulting Economic Confidence Index has fallen since last July and is now worse than it was in April 2020, at the start of the pandemic.

    Voters from both parties will hold President Joe Biden and the Democrats accountable for whether things feel on the right or wrong track, said Sarah Binder, a political science professor at George Washington University.

    “Slow growth — potentially still coupled with high inflation — inevitably makes it harder for the president’s party to win elections,” Binder said Wednesday, before the latest numbers were released. “With slim majorities and Biden’s popularity sagging, there’s a strong risk that Democrats could lose control of both chambers.”

    The White House was girding itself for criticism.

    A senior administration official, in an interview Wednesday, said the quarterly slump would largely be due to two technical factors — a large increase in the trade deficit as imports surged, and a significant slowdown in inventory building — and doesn’t signal that the economy is weakening.

    Thursday’s report showed the trade deficit dragged down growth by 3.2 percent in the first quarter, while the decline in inventory investment shaved off 0.84 percent.

    Under the hood, the economy still looks very strong, the senior official said Wednesday.

    Final sales to domestic private purchasers — a metric that economists often point to as a true reflection of the underlying health of the economy — rose 3.7 percent, according to the latest report. Consumer spending rose 2.7 percent, gross private investment expanded at a 2.3 percent pace and residential investment rose 2.1 percent.

    In fact, demand was so strong that domestic production couldn’t keep up, forcing businesses to import more goods from overseas, Amherst Pierpont chief economist Stephen Stanley said Wednesday.

    “This is what an overheating economy looks like,” said Joe Brusuelas, chief economist for RSM US LLP, after the GDP data was released.

    A single quarter of negative growth does not mean the U.S. economy is in recession — that determination is made by a panel of experts at the National Bureau of Economic Research and factors in data over many months. Still, Wells Fargo economists Jay Bryson and Shannon Seery said in a note to clients Wednesday, “the probability of a recession next year is not insignificant.”

    Broadly speaking, this is what one might expect or even hope to see when policymakers are trying to cool an overheating economy, said Tony Fratto, a former White House spokesperson for President George W. Bush and now a partner at Hamilton Place Strategies.

    “The prescription when you have full employment and inflation is to take the froth out of the economy for a little bit,” Fratto said Wednesday. “But the politics of negative growth, even for a quarter — at this time, in a midterm election year — are really, really risky for the White House.”

    Democrats need to be ready to contend with Republicans ready to hammer them over the growth slowdown, which, coupled with high inflation and rising interest rates, may start to feel more like malaise, he added.

    “They’re not going to be talking about inventories,” he said of the GOP. “They’re purely going to be talking about how the Democrats’ big spending caused inflation and a slowdown in the economy, and now it’s only going to get worse.”

    Republicans jumped on the news.

    “Accelerating inflation, a worker crisis, and the growing risk of a significant recession are the signature economic failures of the Biden Administration – and will likely get worse,” said Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee.

    The senior Biden administration official pointed to a thread Wednesday from Jason Furman, former chair of President Barack Obama’s Council of Economic Advisers, explaining why technical factors in the first quarter masked the economy’s underlying strength.

    But one analyst said that kind of messaging from the White House wouldn’t work.

    “Any time you’re relying on a 12-tweet thread from Jason Furman to explain why actually the economy is better than it looks — particularly when GDP is already an abstract thing that people are not necessarily intuitively feeling, unlike inflation — I think it makes the story they’re trying to tell now even tougher,” said Liam Donovan, a principal at Bracewell LLP and a former GOP operative. “There’s only so many indicators left that can provide good news. The last thing they need is further bad news.”

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