[Summary] Calm Market Despite US Economic Contraction... Fed Continues on Rate Hike Path

[Asia Economy New York=Special Correspondent Joselgina] Although the U.S. economic growth rate retreated for the first time since the second quarter of 2020, right after the pandemic, no market turmoil was observed. Considering that a decrease in Gross Domestic Product (GDP) is generally regarded as a signal of a 'recession' and the recent high volatility in the New York stock market, this is somewhat unusual.

Experts analyze that the negative growth in the first quarter is a kind of 'noise' and that the U.S. economy is maintaining solid growth. It is also expected that the Federal Reserve's (Fed) tightening moves, as an inflation fighter, will not have a significant impact.

◇ "Consumption and Employment Are Good"… U.S. Negative Growth Is an ‘Optical Illusion’

On the 28th (local time), major indices of the U.S. New York stock market surged despite the preliminary GDP growth rate for the first quarter being announced just before the opening, showing an annualized rate of -1.4%. The Nasdaq index, centered on technology stocks, jumped 3.06% compared to the previous session, while the Dow Jones Industrial Average and the S&P 500 also closed up 1.85% and 2.47%, respectively. In the bond market, the yield on the benchmark 10-year U.S. Treasury note briefly soared to the 2.88% range. The rise in Treasury yields indicates a drop in the price of safe-haven government bonds.

This implies that the market did not interpret the first-quarter negative growth as a signal of recession. Stephan Stanley, chief economist at Amherst Pierpont Securities, stated, "GDP figures do not necessarily accurately reflect the economy." Ian Shepherdson, chief economist at Pantheon Macroeconomics, evaluated the first-quarter growth rate by saying, "This figure is not a signal of (economic) recession but merely noise," and "the economy is not sliding into a recession."

Experts view this negative growth as a 'numerical result' caused by the deepening U.S. trade deficit. Economic media CNBC reported, "The U.S. trade deficit in the first quarter was the largest ever, pulling down the overall GDP by 3.2 percentage points," adding, "While domestic consumption activities in the U.S. became more active, the economic conditions of other countries did not improve, resulting in a slowdown in export growth." The New York Times (NYT) also reported, "The weakness in the first quarter was due to the U.S. recovery being stronger than that of other countries worldwide." Additionally, the reduction in government spending due to the decrease in COVID-19 stimulus measures negatively affected the growth rate.

On the contrary, detailed indicators confirm the strong resilience of the U.S. economy, such as personal consumption expenditures (annualized 2.7%) and business investment (annualized 9.2%), which account for two-thirds of the real economy. This is the background behind President Biden boasting about the U.S. economic resilience on the day and dismissing concerns about a recession. Employment remains strong as well. The U.S. Department of Labor announced that the number of continuing unemployment claims for more than two weeks (April 17?23) was 1,408,000, the lowest in 52 years since February 1970. Diane Swonk, chief economist at Grant Thornton, commented, "The U.S. economy still shows astonishing resilience."

◇ Fed Tightening Likely to Continue

The U.S. growth rate for the second quarter is expected to rebound. According to a Wall Street Journal (WSJ) survey, the GDP growth rate for the second quarter is estimated at 2.98%. Shepherdson predicted, "The U.S. trade balance will act as a factor raising the growth rate in the second or third quarter." The analysis suggests that even if growth slows compared to previous years, it will not fall into a recession.

Some speculate that the retreating GDP figure might make the Federal Reserve (Fed), the central bank, more cautious in its monetary policy moves. However, considering the still-high inflation and the fundamentals of the U.S., the general consensus is that the Fed's tightening path will not change. Private demand in the first quarter was 3.7% annualized, far exceeding the Fed's long-term expectation of 1.8%. Sal Guatieri, chief economist at BMO Capital Markets, assessed, "The Fed will have no choice but to implement aggressive rate hikes in May to curb inflation."

However, warnings of economic slowdown continue amid external uncertainties such as China's strengthened COVID-19 lockdown measures and the prolonged Russian invasion of Ukraine. High inflation not only reduces household purchasing power but inevitably leads to increased corporate production costs and price hikes. There are also repeated assessments that negative growth itself should not be taken lightly, regardless of the U.S. economic fundamentals.

Harvard University professor Kenneth Rogoff wrote in a column, "The threat of a synchronized global recession in Europe, the U.S., China, and other regions is increasing day by day," and diagnosed, "Considering U.S. inflation, the possibility of a soft landing without significant damage to growth is becoming increasingly slim."

This content was produced with the assistance of AI translation services.