The U.S. economy’s latest report card—featuring fresh readouts on growth, inflation, spending and wages in the first three months of the year—is set to include a mix of good and bad marks.
The headline measure of first-quarter economic growth will appear weak, as a ballooning trade deficit and slower inventory growth masked solid consumer spending. Income gains in March were likely erased by an acceleration in inflation.
Resilient consumption, robust business investment, firmer wage growth and the fastest price gains in decades lend support to a more aggressive policy response from the Federal Reserve next week, when officials are expected to raise interest rates by the most since 2000.
But ultimately, the figures are backward looking. How the economy weathers persistent inflation, dwindling fiscal support, rapid interest rate hikes and any potential shocks in the year ahead is far from certain. The Fed has a tough task ahead—slow the economy enough to get a handle on inflation, but not so much so that it causes a recession.
Here’s a look at where the economy stands—and economists’ best guesses for where it is headed.
Economic Growth
Gross domestic product is expected to have grown at an annualized pace of just 1.1% in the first quarter, marking a rapid slowdown from the 6.9% pace at the end of 2021. But the deceleration will largely reflect a slower pace of inventory growth and a wider trade deficit, rather than a weakening in consumer and business demand.
“That headline is going to be misleading,” said Sarah House, senior economist at Wells Fargo & Co. “Overall the details will show it’s another strong quarter.”
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Looking ahead, businesses will continue to replenish their inventories, with quarter-to-quarter fluctuations. Meantime, net exports will likely continue to be a drag on growth for the rest of the year, given “the U.S. economy is a lot stronger than what we’re seeing globally,” House said.
As for the consumer, “they’re spending with a little bit more discretion than they were—say six months ago—but they’re still spending,” said Gregory Daco, chief economist at Ernst & Young LLP.
Bolstered by a tight jobs market, solid wage gains and leftover savings from trillions of dollars in government stimulus, Americans continue to dole out cash for a variety of goods and services despite growing headwinds. Economists expect consumer spending grew at a 3.5% annualized pace in the first three months of the year, which would be the strongest pace in three quarters.
What Bloomberg Economics Says...
“A slowdown in the first quarter will prove temporary, a consequence of omicron and the drag from volatile inventories and trade. We estimate growth will rebound sharply to 3.5% in 2Q, from an estimated 1.1% in the first quarter. The economy remains resilient, on track to expand by an above-trend 2.5% this year.”
—Anna Wong, Yelena Shulyatyeva, Andrew Husby & Eliza Winger, economists
Pent-up demand is expected to help sustain outlays in the months ahead as households increasingly spend on services like travel and dining out. But a variety of factors, including persistent inflation, higher interest rates and a fragile global backdrop, will lead to a moderation in spending growth as the year goes on.