Significant uncertainties cloud the future for the U.S. and the global economies over the month of May. Russia's war against Ukraine has interrupted trade in energy, grains, and other commodities, driving up fuel and food prices considerably. China's rigorous Covid breakout has also hampered the world's second-largest economy's growth and exacerbated global supply chain bottlenecks. According to the most recent estimate, the U.S. economy decreased in the first three months of the year, despite individuals and businesses continuing to spend at a steady pace. The Commerce Department estimated that the GDP - the broadest measure of overall output - decreased by 1.5% annually from January to March, a modest downward revision from its previous estimate of 1.4%.
The economic activity fell for the first time since the second quarter of 2020. A higher trade deficit and delayed restocking of items in stores and warehouses contributed to the decline. The country spent more on imports than on exports to foreign countries. The trade deficit reduced GDP by 3.2 percentage points in the first quarter. With the economy showing contraction, consumer spending provides hope, and analysts predict the economy to resume rising in the current April-June quarter. In the meantime, the Federal Reserve May raised the benchmark rate by half a basis point and has announced to increase the rate by the same magnitude in upcoming meetings in June and July, however, the monetary policy path down the lane remains unclear.
Although the country remains stuck in the agony of excessive inflation, which has wreaked havoc on lower-income households, in particular, consumer spending, the lifeblood of the economy, remains strong - from January to March, it expanded at a 3.1% annual rate. Additionally, business investment in equipment, software, and other items aimed at increasing productivity increased at a healthy 6.8% annual rate in the last quarter. A thriving job market also provides people with the money and confidence to spend. The government reported earlier this month that U.S. firms added 428,000 jobs in April, bringing the unemployment rate to 3.6%, slightly above the lowest level in a half-century. In the midst of the greatest inflation in four decades, employers have added at least 400,000 jobs for 12 straight months.
In the same line, the only thing hotter than the U.S. employment market was inflation. Earlier in May, the government revealed that U.S. producer prices rose 11% year on year in April, indicating that high inflation will continue to be a hardship for consumers and businesses in the months ahead. Also, consumer prices rose 8.3% year on year in April, slightly below 8.5% in the previous month, although remain four decades high. Furthermore, Russia's invasion and accompanying events increased inflationary pressures and are likely to weigh on economic growth. In an effort to manage inflation, the Fed decided to go all-in with blazing guns, employing monetary policy instruments to decrease inflation and ensure a "soft landing" for the economy. Having said that, the Federal Reserve hiked interest rates by a half percentage point at its meeting in early May, its most aggressive move since 2000. Furthermore, the central bank has signaled that it would continue to raise rates by 50 basis points in June and July, however, ruled out the possibility of an aggressive hike of 75 bps and above.
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