Insights

May 12, 2022 | Economic Outlook

Economic Outlook - May 2022

  1. U.S. Gross Domestic Product (GDP) contracted at a -1.4% annual rate in the first quarter (Q1) of 2022. The primary reasons for the drop were the trade deficit and business inventories. International trade has been impacted by pandemic restrictions and shipments entering the U.S. have been delayed as a result. Also, companies weren’t able to build inventories as quickly in Q1 due to shortages of materials. Those factors should be resolved going forward and there were important bright spots in the report which point to a rebound in U.S. GDP in the coming quarters. Consumer spending saw a shift from goods to services and grew 2.7% in Q1. Capital expenditures and other business spending was robust and increased 9.2% during the quarter. Overall private demand grew at a 3.7% annual rate in the first quarter which was an acceleration from 2.6% growth in the fourth quarter of 2021. We expect the U.S. economy to expand in 2022 and foresee GDP growth of 3.5% – 4.0%.

  2. The U.S. economy continues to create jobs and the unemployment rate remains low. Also, there are more job openings than people looking for employment. The Labor Department report for April showed that nonfarm payrolls increased by a better than expected 428,000 new hires. In addition, at 3.6%, the unemployment rate was unchanged from March. Average hourly earnings rose at a 5.5% annual rate during the month which was both below consensus and a deceleration from March.

  3. Amidst low unemployment and a very tight labor market, wage growth has been an important contributor to the expectation for an elevated inflation environment. Furthermore, wage growth is viewed as a more persistent form of inflation as it is not as volatile as other components such as food and energy. Another persistent category is housing and equivalent rent. Recent data on the housing market show demand exceeding supply, resulting in increased prices for homes and higher rents. The future outlook for both wages and housing point to ongoing elevated inflation.

  4. The Federal Reserve has committed to a tighter monetary policy to address inflation that is consistently running above their preferred target. At its recent meeting, the Federal Open Market Committee (FOMC) increased short-term interest rates by 0.5% to a target of 0.75%-1.0%. In addition, the FOMC outlined plans to reduce the bond holdings on its balance sheet in order to reduce the cash they injected into the system in response to the pandemic. To accomplish this effort, the Fed will allow bonds to mature without reinvestment, ultimately ramping the amount to $95B a month. Both of these actions met expectations as commentary from Fed officials leading up to the meeting foreshadowed their intentions. At the press conference after the meeting, Fed Chair Powell indicated that further 0.5% increases in short-term rates at their June and July meetings may be necessary given current conditions.

Sources: Bloomberg LLC, FactSet, U.S. Commerce Department, Bloomberg Businessweek

Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.


For more information, call Ed Sullivan, Vice President, at 617-557-9800, or email him at esullivan@welchforbes.com.