“The market is worried about a very fragile economic outlook, as it should be,” said Joe LaVorgna, chief Americas economist at Natixis and former Trump White House economic adviser. “The economy is fundamentally soft: The Fed is going to hike next week, the situation in Ukraine is not getting better and high inflation is cutting into costs.”
At the same time, vacation bookings are soaring, car sales are booming and Americans continue to spend with abandon, thanks to higher wages and brisk hiring. Yet, the economy unexpectedly contracted in the first quarter, led by trade deficits and a drop in inventory purchases.
The economy’s diverging paths played out in a Commerce report on Friday that showed surges in both consumer spending, up more than expected in March, and inflation, which shot up in March by the most in more than 15 years.
“There are so many factors pulling on our economy right now — the uncertainty and low numbers — despite the fact that demand is so high,” said Tara Sinclair, an economics professor at George Washington University. “That can be worrisome because when businesses and decision-makers — from the household level to Fortune 500 companies — start worrying about the ‘R’ word, it can become a bit of a self-fulfilling prophecy. ”
On Capitol Hill, politicians are pouncing on widely divided numbers to support their policymaking pursuits ahead of the critical 2022 midterm elections. Two years after the worst economic crisis in generations, perhaps no issue is likely to motivate Americans more at the polls than the state of their own finances.
Democrats this week insisted that the 1.4 percent annualized drop in gross domestic product reflected broader economic tail winds — from new shortages in global supply chains to the evolving consequences of Russia’s invasion of Ukraine. As they have for months, party lawmakers instead tried to highlight other, more encouraging indicators, including a continued burst in hiring, a low unemployment rate and sustained consumer spending, all under Biden’s watch.
“It’s not a good sign,” Sen. Richard J. Durbin (D-Ill.), the majority whip, said about the GDP numbers during a brief interview. “[But] there are enough positive indicators that things can turn around.”
Meanwhile, for Republicans, the economic contraction provided fresh fodder to intensify their opposition to Democrats’ legislative solutions in the face of a potential sea change this November that might elevate them to majority power. Few GOP lawmakers are expected to support any of Democrats’ efforts to combat inflation, for example, which Republicans instead blame on Biden’s spending policies.