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The U.S. economy slowed down over the first three months of the year, the first time it has contracted since the pandemic brought it to a screeching halt. There have been other troubling signs, most notably inflation and concerns over the rise in borrowing costs. Diane Swonk, of the economic services firm Grant Thornton, joins Judy Woodruff to discuss.
As we reported, the U.S. economy slowed down over the first three months of the year, the first time it has contracted since the pandemic brought it to a screeching halt. There have been other troubling signs, most notably inflation and concerns over the rise in borrowing costs.
Let's get some analysis of what to make of this.
Diane Swonk joins us again from the economic services firm Grant Thornton.
Diane Swonk, welcome back to the "NewsHour."
So, last year, we saw roaring growth, first quarter of this year, a slowdown. What is behind this?
Diane Swonk, Grant Thornton:
Well, we really saw was sort of a tale of two economies.
We saw the domestic economy, the consumer, homebuying, building and business investment all accelerated in the first quarter off the fourth quarter, while the trade deficit absolutely ballooned. We saw exports fall at their fastest pace since the onset of the pandemic in 2020, as the — everything from the Omicron wave to the war in Ukraine and new lockdowns in China take a bigger toll on growth abroad than at home.
We also saw continued double-digit gains in imports here in the United States, as we were trying to bring in and catch up on losses from the Delta wave last summer. So, where we saw the strength was really the pillars of the U.S. economy, the consumer, the housing market, although all-cash buyers are clearly pushing out first-time buyers, and business investment actually accelerating.
That resilience that we saw off of 1.7 million jobs generated, something that was like what we would do in a year in the 2010s, in one quarter, that helped to buoy the domestic economy, even as the foreign side of the economy imploded. And government spending also fell quite dramatically, as defense spending was cut.
Now, we know that's going to be reversing course soon too.
So, we look at all these different indicators. Which ones do we look to for the most accurate picture of what's really going on in the economy?
Well, from the perspective of the Federal Reserve, what really matters most is that inflation in the data today as well hit a 40-year high at the same time that domestic demand actually accelerated.
That's important for the Fed, because that resilience, as good as it, is — also means that it's allowing inflation to continue to flare. And that's something that Fed is really concerned about. It would like to see demand slow down to meet a supply-constrained global economy.
The problem is, to do that, you got to hammer on demand pretty hard. And the chances of getting things just right, like — in the Goldilocks and getting the porridge just right, not as easy as just moving around the table. And Goldilocks only exists in fairy tales.
And inflation, you mentioned, Diane, there are more numbers coming tomorrow. We can look. The Fed chairman, Jay Powell, himself has said they may be looking at a half-point increase.
How much is that expected to slow down the economy?
Well, we're looking to see some of the fastest rate increases since 1994, if not faster, because, in addition to what will be two back-to-back likely half-percent increases in May and June, we're also going to see the Fed start to reduce that mammoth balance sheet it has.
And, really, that's kind of an unknown, as it reverses course on its balance sheet. But it's kind of like driving through — using the rearview mirror. You can't see all the obstacles you might hit. That could be the fastest tightening cycle we have seen since the 1980s to deal with 1980s levels of inflation. That's really hard.
And what we're worried about is that the U.S. economy slows to a stall speed in the second half the year, where we actually don't see this underlying domestic demand and we actually start to see, by year end, a rise in the unemployment rate.
And when you say slow down, of course, there is starting to be discussion about whether — what are the prospects for another recession?
What are the signals we should be looking at to see whether that is on the horizon or not?
Well, really, the issue is whether or not we can keep — slow down the demand for workers. It's up 60 — more than 60 percent since February of 2020. The supply of workers is not up that much since 2020.
There's just no way we can possibly see — even if we got a lot more workers participating in the labor force, which has come back, to get that — to meet that demand. And so what the Fed would like to do is cool those job openings a bit to bring it down closer to supply.
It's over a five million gap right now. What I worry about is that we're not going to be able to do that without raising the unemployment rate as well and increasing the supply of workers. And I think the probability of recession is very high in the second half of the year and as we move into 2023. In fact, we're forecasting what's called a growth recession, which is when growth is not enough to hold unemployment down, and it continues to rise in 2023 to derail the inflation we have and get it back to being insignificant to most consumers.
But, meantime, all eyes are — or, I should say, many eyes are on the Federal Reserve and what it does.
The Federal Reserve is going to be driving this. And the Federal Reserve is forcibly going to be bring inflation down. They're going to be committing to that again and doubling down on it next week. And I think that's a very important message to watch, is, how aggressive does the Fed can want to continue to be after this initial liftoff, which is already going to be very aggressive?
They have got credibility on the line here. They're behind the curve on inflation.
Diane Swonk with Grant Thornton.
Thank you, Diane.
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