The US GDP surprisingly posted a 1.4% decline during the first quarter. This shrinking of the economy surprised experts as domestic demand remained strong.
US GDP Declines By 1.4%, Economists Surprised
The US Gross Domestic Product (GDP) numbers showed a perplexing drop of 1.4% during the first quarter.
Economists point to a new resurgence of COVID-19 cases that coincided with the decrease in government spending for the pandemic.
However, these experts said that the negative US GDP growth numbers are misleading. Domestic demand for goods and services remained strong throughout the 1st quarter.
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The decline is the first for the US economy since the pandemic started two years ago.
The US Commerce Department, which prepared the economic report, said that the decline was mostly due to a wider trade deficit. During the period, imports surged even as local inventory accumulation slowed down.
Economy Still Resistant Despite US GDP’s 1.4% Contraction
Meanwhile, domestic demand picked up from a slower pace during the fourth quarter of last year. The increase in domestic demand is helping calm down fears of a coming recession.
Other government interventions are also in the works to continue the battle to bring down high inflation rates. This includes the Federal Reserve’s plan to hike interest rates by 0.5% by next week.
This is the second time the agency raised rates this year. It plans to do more in its upcoming Federal Open Market Committee (FOMC) meetings. The Fed will also accelerate its decision to jettison the Treasury assets it accumulated over the past two years.
Sal Guatieri, the senior economist at BMO Capital Markets, expressed optimism but cautioned others to manage their expectations. “The economy is still showing some resilience,” he said.
However, the “first-quarter GDP report signals the start of more moderate growth this year and next,” he added. “Despite the contraction, the Fed has little choice but to hike aggressively in May to corral inflation,” Gualtieri said.
US GDP Posted Surprising Negative Decline
Last quarter, the US GDP fell by 1.4%, according to the government’s advanced GDP estimate. The actual numbers proved way off the mark set by economic experts.
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A Reuters poll showed consensus predictions for the first quarter was a growth of 1.1%. Others paced their forecasts between 1.4 contractions to a high of 2.6% growth.
In addition, supply chain challenges remain a big threat to the US economy. The unholy trinity of supply chain issues, worker shortage, and runaway inflation is pushing the US to recession territory.
However, local manufacturing is humming along. Manufacturing output rose by 5% while the economy generated 1.7 million jobs. Conrad DeQuadros, senior economic advisor at Brean Capital, “It is nonsense that real GDP declined,” he said.
Watch the Bloomberg Markets and Finance video reporting what caused the unexpected decline in the US GDP:
What do you think of the US GDP reporting a decline in growth rate? Is this a sign that America is heading into a recession? Or, should we put more faith in the Fed so that they know what they’re doing?
Tell us what you think. Share your comments below.