First quarter 2023 economic growth was not good, after all the conjecture over where US growth is headed. The U.S. economy grew at just a 1.1 percent annual rate in the first three months of this year, as declining business investment offset strong consumer spending causing the slower growth.
Consumer spending kept US economic growth barely positive. So the Fed’s rate hikes are making a difference. But it was businesses cutting back on spending and stocking inventories, not consumers that slowed Q1 growth.
Consumer spending is the main engine of U.S. growth and grew 3.7 percent, the government said Thursday. It was the biggest increase in almost two years. Businesses are now aggravating the inflation problem by not meeting consumers’ needs, reducing investments and production at a time when consumers are still consuming, thus keeping prices from declining more quickly.
What is the Fed to do with one more rate hike scheduled? They are harming future growth six month to a year ahead, while consumers want to spend because they are still fully employed.
One economist believes we are already in a rolling recession, with some sectors still growing while others are shrinking. Consumers still love leisure activities like dining out and travel, for instance, but are buying fewer things like cars and other durable goods.
Businesses like manufacturing see this as recessionary and so have cut back on investments, and hence future growth.
“The strong and healthy job market is one of the reasons we’re not seeing every sector declining simultaneously as we do in a classical recession,” said Sung Won Suhn, an economist at Loyola Marymount University. “This is the bedrock of the economy that’s enabled a more moderate rolling recession,” who was cited in the Washington Post.
We can therefore say the Fed has already induced a recession, but a mild one if the Fed will now pause in its rate hikes. They should pause because the simple fact is regional banks are still in trouble, such as First Republic that has seen another multi-billion dollar withdrawal of deposits that sent its stock plunging 50 percent recently.
So the Fed maintains it is now the job market that is causing stubborn inflation because Americans are still fully employed!
But is it wise for the Fed to now want to put workers out of work at a time when banks are faltering, there is a major European war, and there is still a scramble for available resources?
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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