Q1 GDP worse than expected – what this means for interest rates

The final estimate of GDP in the first quarter of 2022 showed the contraction to be worse than initially thought. (iStock)

The U.S. economy contracted more than expected in the first quarter of 2022, according to the third and latest estimate from the Bureau of Economic Analysis (BEA).

Real gross domestic product (GDP) contracted 1.6% in the first quarter, more than the 1.5% contraction previously estimated, according to the BEA. The change in the third estimate is mainly due to a revision in personal consumption expenditure (PCE) which was partly offset by an upward revision in private investment in inventories. For comparison, in the fourth quarter of 2021, GDP grew by 6.9%.

In fact, this contraction marks the first drop in GDP since the second quarter of 2020, when the United States was in the midst of the COVID-19 recession.

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Economists weigh the possibility of a recession

A recession occurs when the economy experiences two consecutive quarters of economic contraction. After the drop in the first quarter of this year, all eyes will be on the next GDP reading – which will be released on July 28 – to determine whether the United States is currently in a recession.

Gary Black, managing partner of The Future Fund LLC, shared his reaction to the first quarter GDP reading on Twitter.

“US Q1 Ending GDP -1.6%, Putting Economy on Track for Back to Back Negative Quarterly GDP Readings, Which is a Recession,” black tweeted. “The Fed’s aggressive tightening policy to tackle Covid-induced inflation which is already receding will likely cause the Fed to suspend rate hikes after a 50-75 basis point hike in July”

However, another economist remained optimistic. Mike Schenk, chief economist of the Credit Union National Association (CUNA), said in a recent economic update that while interest rates are rising and inflation is at its highest level in 40 years, he remains “optimistic” about the possibility of a recession.

“If you made me put a percentage on the recession outlook, I would say, right now, maybe somewhere between 35% and 40%,” Schenk said. “We are reviewing all of this data continuously in real time, adjusting our outlook accordingly. But, at the moment, I am still relatively optimistic.”

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The Fed is expected to continue raising rates

Despite a struggling economy and an increased risk of recession, inflation remains high and could push the Federal Reserve to continue raising interest rates in order to bring them down.

At its June meeting, the Federal Reserve rising interest rates of 75 basis points, the largest rate hike since 1994. Prior to that, the Federal Reserve rising interest rates 50 basis points in May and 25 points in March. The Fed is also expected to raise rates multiple times this year and through 2023.

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