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So much for the “roaring twenties,” say Valentina Romei and Alan Smith in the Financial Times. After nearly two years of rapid growth following the initial shocks of the 2020 pandemic lockdowns, the Commerce Department reported last week that the US economy contracted abruptly in the first three months of 2022, shrinking at an annual rate of 1.4 percent . Economists expected us to fall short last year when the economy grew 5.7 percent. But “the dual shock of COVID-19 and the Russian invasion of Ukraine” have pushed inflation well above expectations, leaving the US and other economies at risk of a “painful mix of high prices and low growth known as ‘stagflation'” , exposed to employers forced by a tight labor market to raise wages, inflation looks more likely to “take hold”. Most economic watchers expected a strong 2022; Instead, we ask ourselves, “How bad could it get?”
Headlines about the economy aren’t the whole story, Neil Irwin said in Axios. Trade deficits weigh heavily on GDP calculations as imports are subtracted from the total. During the quarter, exports fell sharply on weaker overseas economic growth while imports surged, reflecting “an economy with significantly stronger domestic demand than the rest of the world.” Despite inflation, consumer spending remained solid – a positive sign for “the underlying growth of the US economy”.
Investors don’t see any hopeful signs, Mohamed El-Erian told the Financial Times. The S&P 500 fell 8.8 percent last month and had its worst start to the year since World War II. Nasdaq fared even worse, falling 13.3 percent, and even traditional safe haven government bonds have collapsed. After the Fed “turbocharged” markets for two years, investors have finally accepted that “the central bank has no choice but to take its foot off the accelerator.” Amazon suffered its worst share decline since 2006 after the e-commerce giant said it lost money in the first quarter and expects more losses, Matt Day told Bloomberg. As a guide to consumer spending, Amazon’s results are “closely monitored to determine whether shoppers will cut back on purchases to offset rising prices.” Demand “remains strong,” the company said, but not strong enough to support the “hiring and inventory-building binge” that’s been going on during the pandemic.
This isn’t a 1970s redux, Alan Blinder said in the Wall Street Journal. When supply shocks in 1973 caused inflation to spike and growth to slow, “nobody knew what to think about it,” and the Fed’s hesitant responses reflected that ignorance. The lesson has been learned, and economists “now understand that inflation and unemployment will naturally rise or fall together when supply shocks dominate the roost.” The Fed “underestimated how long it would take for supply to catch up with rising demand” and rates should now rise significantly. But the economy remains “fundamentally healthy,” with low unemployment and Americans sitting on excess savings that should cushion the blow of a downturn. Any recession we get “shouldn’t be deep and long”.
This article was first published in the latest issue of The Week magazine. If you’d like to read more, you can try six issues of the magazine risk-free here.
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