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On the Road to Stagflation? U.S. Economy Fell 1.4% in First Quarter

Economía de Estados Unidos cayó 1.4 % durante primer trimestre de 2022

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The U.S. economy fell 1.4% during the first quarter of 2022, according to Commerce Department data, marking the first contraction in U.S. Gross Domestic Product (GDP) since the start of the 2022 pandemic.

The decline in U.S. GDP is due to slowing business demand, a trade deficit that continues to widen (the U.S. imports more than it exports), and the end of the pandemic stimulus also led to slowing economic growth.

With inflation rising and the recovery of jobs lost during the pandemic, the Federal Reserve (FED) decided to raise the interest rates at which it lends to Commercial Banks, limiting cash flow and raising the cost of credit in the economy.

The labor market, the key to determining the strength of economic growth, is at historic lows for unemployment claims. However, companies are still struggling to find staff, and in some sectors, such as warehousing and transportation, they simply cannot find enough qualified personnel.

In the face of inflation in the U.S. economy, consumers have opted to cut back on spending. (Image: EFE)

Perhaps the most serious problem affecting the U.S. economy is high inflation, which in March exceeded 8.5% annually, a rise in prices not experienced in the country for 40 years.

Many American households, faced with rising prices, have opted to cut back on consumption and demand fewer goods and services. This lower consumer spending is also negatively affecting the growth of the U.S. economy.

The war in Ukraine, supply chains that continue to be affected by the aftermath of the pandemic, and China’s Zero Covid policy (which has led to forced quarantines for millions of people across the country) are also impacting prices that have been rising since 2021.

U.S. producers have had to bear the brunt of the price hikes. While consumers faced inflation of 8.5% in one year, producers faced an increase of 11.2% in the same period of time.

U.S. producers have seen their margins reduced by problems in supply chains and the war in Ukraine. (Image: EFE)

In some sectors, such as construction, costs have risen as much as 16% in less than a year. Housing prices have also risen 17.1% since last year, bringing the average price of a home to $412,156. The increase in housing costs has caused a 7.8% decrease in home sales over 2021.

Public and private debt in the economy is at historic highs. While private debt hovers around 224 % of U.S. GDP, public debt exceeds 125 %.

The rise in interest rates to contain inflation makes the cost of debt more expensive so that both the state and American families will have to spend a greater percentage of their money to pay interest on their debt, which negatively impacts economic growth.

According to the latest Bank of America survey, up to 60% of the investors surveyed fear that the United States is plunging into stagflation, i.e., negative economic growth and high inflation.

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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