Economy Unexpectedly Shrinks in First Quarter

(KNSI) – The American economy contracted in the first quarter, surprising analysts. The report was issued Thursday morning by the United States Commerce Department’s Bureau of Economic Analysis, or BEA. On an annualized basis, it shrunk by 1.4%, with weakness in exports and inventories blamed for the miss.

Dean of the School of Public Affairs at Saint Cloud State University, King Banaian, says in some ways the headline number is misleading. Business investment remains strong and the American consumer continues to buy. He says, “If I look just at private domestic demand for goods and services, that number came in right around that 1.5-2% number we all expected.”

He explains how the end buyer can continue to hold up and sales are occurring, but the gross domestic product is hurt. Banaian says, “If you are measuring production when you use your inventories to fill the demand for goods and services that doesn’t add to your GDP, but people are still getting their stuff for households and for businesses.”

Banaian says typically when there are inventory drawdowns the effect is temporary. Companies should restock in the coming quarters to continue to have products to sell providing a boost for those timeframes. COVID-19 shutdowns in China, geopolitical tensions in Europe, and other factors could mute the economy’s ability to naturally correct, though.

Banaian says weakness in exports would naturally cause foreign currencies to strengthen under normal circumstances. He says there is some flight to safety occurring as investors steer clear of a European continent embroiled in war.

He also adds the Federal Reserve is expected to be quicker to tighten than other central banks. As interest rates rise and there are greater returns to be earned on American assets, that will lead to further dollar strength. For global investors to buy treasury bonds or corporate debt they first have to convert their money into our currency. When the dollar rises, American-produced products become more expensive compared to the same goods made elsewhere.

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