Stocks in Europe have ended the day higher, despite the suprise fall in US economic growth last quarter. In London, the FTSE 100 closed 84 points higher at 7,509, up 1.1%, led by Standard Chartered (+14%), Aveva (+6.75%) and Whitbread (+4.3%). David Madden, market analyst at Equiti Capital, says the announcement the US economy contracted at an annual rate of 1.4% in the first quarter of this year was a big surprise. It is worth remembering the economy expanded by 6.9% in the final quarter of last year, so it is a major deceleration. Two consecutive quarters of negative growth defines a technical recession. Keep in mind, the Russian invasion happened more than halfway through the first quarter, so if the first three months saw a negative reading, it does not bode well for the second quarter. Despite the pull back, the US dollar is still up 0.5% on the day, which speaks volumes about the strength of the currency. In light of the -1.4% growth report, the Fed might look to rein in its hawkish commentary because negative growth and higher borrowing costs is not a good combination.

The unexpected drop in US GDP in 2022 Q1 is not that unexpected given the uncertainty gripping the US, argues Professor Costas Milas of University of Liverpool. Prof Milas has plotted the U.S. output gap (output relative to potential in the U.S) along with a measure of ‘aggregate uncertainty’ in the US. That measure covers financial, economic, epidemiological and geopolitical uncertainty, which have all risen recently: A chart of US economic output gap vs uncertainty Photograph: Professor Costas Milas Their correlation is astonishingly high and equal to -0.62 which suggests a very damaging impact of rising uncertainty on the U.S. economy. The figure draws from my recent piece for LSE Blog Politics where I argue that rising uncertainty is a very reliable predictor of U.S. and U.K. output. In other words, once uncertainty is taken into consideration by the Fed and the Bank of England (as early as next week), sharp and rapid rises in interest rates are far from certain.

In the currency markets, the US dollar has climbed to its highest level in two decades. The dollar index hit a 20-year high against a basket of currencies today. It extended its recent surge as rival currencies falter, and traders anticipate sharp increases in US interestg rates this year. The yen weakened to a new 20-year low after the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds, to keep government bond yields low. The euro has also weakened, on concerns over the eurozone economy if gas supplies from Russia are cut off. The pound has also dropped again, hit by concerns over the UK’s economic health. It has lost another cent to hit a new 21-month low to $1.245, with traders concerned that the British economy is being hit by weak consumer confidence, a cost of living crisis, rising input costs and supply chain disruption.

US president Joe Biden has blamed ‘technical factors’ for the drop in GDP in the first quarter of the year. In a statement, Biden points out there were bright points in the growth report, such as rising consumer consuption: The American economy — powered by working families — continues to be resilient in the face of historic challenges. Last quarter, consumer spending, business investment, and residential investment increased at strong rates. The number of Americans on unemployment insurance remains at the lowest level since 1970. Later this morning, I will meet with small business owners who are creating and growing their businesses at a historic rate. While last quarter’s growth estimate was affected by technical factors, the United States confronts the challenges of Covid-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength. Biden also urges Congress should agree a bipartisan innovation bill to bolster US supply chains and make more in America. More here.

NEW: Pres. Biden says last quarter's growth estimate "was affected by technical factors."



"The United States confronts the challenges of COVID-19 around the world, Putin’s unprovoked invasion of Ukraine, and global inflation from a position of strength.” https://t.co/hT5x58XF8f pic.twitter.com/BMT40knRCE — ABC News Politics () April 28, 2022 Those ‘technical factors’ would include the drop in business inventories, which knocked GDP lower. But growth was also pulled down by the slump in net trade, as America’s imports jumped as exports fell (as explained earlier). Since some people seem unclear about this:



GDP stands for Gross Domestic Product(ion). GDP is related to domestic demand, but it's not the same.



Net imports are (obviously) foreign production, which is why they get subtracted from total spending to avoid double-counting.



1/ — Matthew C. Klein () April 28, 2022

The number of Americans filing new claims for unemployment support remains low, in a sign that the jobs market remains solid. There were 180,000 ‘initial claims’ filed last week, down from 185,000 the previous week, data today shows. Initial claims reflect whether more people are being laid off. After surging over 6 million in April 2020, claims have fallen back as the economy reopened. With firms struggling to hire staff, claims fell to 166k earlier this month, the lowest in over 50 years. Initial UI claims last week fell slightly to 180,000 and continuing claims ticked down ever so slightly to 1.41 million. This covers the reference period for next wk's #jobsreport & the decline has been similar to recent months, a good sign for continued growth.#joblessclaims pic.twitter.com/vwkshuJWUf — Daniel Zhao () April 28, 2022

The US GDP report captures many of the cross currents in the world’s largest economy, says Matt Peron, director of research at Janus Henderson Investors: While consumer spend, probably the most important piece, powered ahead at +2.7%, even that had some underlying pockets of softness, especially in hard goods. Inventories and trade brought down the overall number, and inflation was hot. Taken together this will likely not assuage fears that the economic picture is cloudy, with significant risks, and cracks already evident.”

KPMG US senior economist Ken Kim also argues that the US economy is in better shape than the headline GDP figure suggests. Kim says there’s a “low likelihood of a recession this year”: Two swing factors, inventories and trade, pulled GDP lower. Excluding these two measures, a core version of GDP growth, referred to as “final sales to domestic purchasers,” showed a solid increase of 2.7% in Q1 2022.

The best way to interpret today’s GDP data is to combine this quarter and last quarter’s growth rates. In Q4 2021, real GDP growth clocked in at a super-charged rate of 6.9%. The average for the two quarters works out to 2.8%, still a respectable rate of economic growth.” New Data: #GDP contracted by 1.4% (seasonally adjusted annual rate) in Q1 2022, missing expectations for a 1.0% increase. Senior Economist breaks down the numbers and what they mean for economic growth.



Read more from Ken: https://t.co/PJpoY4ybhV pic.twitter.com/iZQ1Bf23Ql — KPMG U.S. News () April 28, 2022

A surge in US defense spending this year will help keep the economy out of recession, predicts Charles Hepworth, investment director at GAM Investments: Here’s his take on the 1.4% drop in US GDP in the last quarter (on an annualised basis) “Consumer spending was marginally weaker-than-expected, no doubt with some price pressures affecting behaviour, but the big hit came through in the overall trade inputs with net imports dragging growth into the red for the quarter. This print is confusing, as on the surface you would be forgiven for thinking all is not well economically speaking. “Take out the trade deficit and the picture is less alarming. This is what the Fed will be focused on when they raise rates again in less than a week. There is little doubt that the next quarter’s numbers will be firmly back in the positive, due to a massive ramp up in government spending in defence. Nothing to see here that alters the Fed trajectory, as they will be looking past the wood for the trees and this data release does nothing to change that.”

Full story: US economy saw ‘unexpectedly severe’ drop in first three months of year The US economy shrank in the first three months of the year, contracting by -0.4% in the first quarter, or -1.4% on an annualized basis, its weakest quarter since the early days of the pandemic. Economic growth slowed markedly at the start of the year. In the last three months of 2021 US gross domestic product (GDP) – a broad measure of the economy – grew by 1.7% or 6.9% on an annualized basis. The Commerce Department said the slowdown was caused by a drop in private inventory investment, exports, federal government spending, and state and local government spending. Consumer spending, the largest component of the US economy, grew 0.7% in the first quarter despite the impact of the Omicron wave of the coronavirus. US economy saw ‘unexpectedly severe’ drop in first three months of year

Paul Ashworth of Capital Economics predicts America’s central bank, the Federal Reserve, will not be deterred from lifting US interest rates sharply next week: The unexpectedly severe 1.4% annualised decline in first-quarter GDP growth probably won’t stop the Fed from hiking interest rates by 50bp next week, since officials will chalk it up to the temporary impact of Omicron and point to the strength of underlying demand - with the growth rate of sales to private domestic purchasers accelerating to a very healthy 3.7%. Net export subtracted a massive 3.2% points from overall GDP growth, with inventories subtracting an additional 0.8% points. Exports fell by 5.9% annualised while, as shipping congestion eased, imports increased by 17.7%. The negative contribution from inventories was inevitable after stock building added 5.3% points to fourth-quarter GDP growth, which was as strong as 6.9%. The other source of weakness in the first quarter was the public sector, as fiscal support was withdrawn, with government expenditure falling by 2.7%.

Economists: US recovery holding up despite Q1 slide The US economy is now technically on the brink of recession (two negative quarters in a row), after shrinking in the January-March quarter, but economists are suggesting this isn’t likely. Robert Frick, corporate economist at Navy Federal Credit Union, argues that the recovery is still on track, once you recognised that weak trade and softer business inventories pushed GDP down in Q1. “GDP contracted in the first quarter by 1.4%, which is a scary drop from 6.9% growth in the fourth quarter of last year, but not scary when you look at the underlying numbers in two categories—trade and inventories. In the other two categories that count most, business and consumer spending, first quarter GDP did well, and clearly those categories are accelerating now into the second quarter. Also, while GDP is an imperfect short-term measure of economic health, better measures such as employment and consumer spending indicate the expansion is steady and on track.” Other economists also insists the US isn’t about to drop into recession, as CNBC explains: “This is noise; not signal. The economy is not falling into recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Net trade has been hammered by a surge in imports, especially of consumer goods, as wholesalers and retailers have sought to rebuild inventory. This cannot persist much longer, and imports in due course will drop outright, and net trade will boost GDP growth in Q2 and/or Q3.” GDP dropped in Q1. Many on Twitter say this is fine, consumption still strong, don't worry yet.



I'm trying to imagine how Q2 growth turns higher despite energy and food inflation, continued supply chain woes, rapidly rising mortgage rates, Europe contracting. Drawing blanks. https://t.co/uYWRycPKyk — Patrick W. Watson () April 28, 2022 The decline in GDP due to:



a) change in business inventories



b) drag from trade deficit and c) decline in govt consumption (-2.7%).



Still, the number is weak, and more importantly, quarterly GDP estimates for the rest of 2022 are coming down too).



(2) — Lawrence McDonald () April 28, 2022

Economists are pointing out that US consumer spending and business investment remained strong in the last quarter, despite the economy shrinking. Instead, it was the drop in inventories, along with falling exports and lower government spending, that pulled GDP down, the Bureau of Economic Analysis data shows: GDP of -1.4% in Q1 is a red flag of how quickly this recovery can sour.



But here's why many economists are NOT panicking: Consumer & business spending remains strong.



Consumer spending +2.7% in Q1 (up from 2.5% in Q4)

Business investment +9.2% in Q1 (up from 2.9% in Q4) pic.twitter.com/E5yPLk35e0 — Heather Long () April 28, 2022 US GDP fell in Q1 but the slide wasn't due to a pullback in consumer spending, which picked up to +2.7% quarterly increase--highest since Q2:2021. Spending on durable goods ramped up, overcoming fall in nondruable goods spending. Also, consumer spending on services accelerated: pic.twitter.com/Tz8B0ZwJqu — James Picerno () April 28, 2022

US economy shrinks for first time since 2020 The US economy shrank unexpectedly in the first quarter of this year, for the first time since early in the Covid-19 pandemic. US GDP fell by around 0.35% in January-March, new data shows, or at an annualised rate of 1.4%. Surging inflation, the Omicron variant, and supply chain problems all dragged on growth. Economists had expected the US economy to keep growing, at an annualised rate of 1.1%, after strong growth of 6.9% in the last quarter of 2021.

This is the first contraction since the second quarter of 2020, when the pandemic hit.

It suggests America’s economy is at greater risk of a downturn, as inflation soars and the Ukraine war hits the global economy.

The drop was partly due to a fall in business inventories, as companies ran down their stocks. Net trade also weakened sharply, with annualised exports down 5.9% and imports jumping 17.7% (which will subtract from GDP). Richard Flynn, Managing Director at Charles Schwab UK, says the figures are likely to cause concern.

The US economy accelerated incredibly sharply as we exited the acute phase of the pandemic and this pace of growth continued until late last year. Whilst the healthy labour and housing market are positive indicators, today’s figures confirm there is now no shortage of headwinds facing the US economy, including the consequences of the Russian invasion of Ukraine, persistently high inflation, and tightening monetary policy. “Consumer confidence is low. We’re in a period of counter-cyclical inflation – when high prices put downward pressure on demand and growth. The Fed’s eye is on inflation as it tightens monetary policy in a bid to slow aggregate demand and cool price rises. With high inflation and low growth expectations, it may be difficult for the Fed to raise rates without slowing growth. Economic data has been generally weakening recently, which is likely to persist, increasing the probability of a downturn.” CNN: The US economic growth rate plunged in the first quarter: “That was a marked slowdown from the 6.9% growth pace recorded in the final quarter of last year, and the worst performance since the pandemic recession in the second quarter of 2020.”https://t.co/rLf4VAGtPu — andrew kaczynski () April 28, 2022

Source: The Guardian

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