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Recession Concerns Grow as GDP Falls and Fed Begins to Tighten

Soaring prices have been the big economic story for quite a while. But there are signs that inflation could be on the verge of getting pushed off the front pages – or at least further down on the front page – to make room for another ominous economic condition: recession.

Last week we received some disconcerting news along the recession front. It turns out that gross domestic product (GDP) fell 1.4% in the first quarter of the year. The consensus estimate was that we would see growth of 1% in the first quarter.[1]

The White House was quick to dismiss the significance of the drop in GDP by attributing it to what President Biden called “technical factors.”[2] He was referring to the determination that growth was pulled backwards by such influences as a drop in exports, a rise in imports and less spending by governments at all levels, rather than by a drop in consumer spending.[3] Indeed, consumer spending increased by 2.7% against a backdrop of rising prices.[4]

By contrast, the Editorial Board at the Wall Street Journal seemed to find the GDP figure worthy of at least modest alarm, noting that the contraction came before any meaningful interest-rate increases had been initiated.[5] In other words, “technical factors” or not, news of a shrinking GDP one week before the central bank raised interest rates by a bigger-than-usual margin of 50 basis points could be viewed as concerning.

As a matter of fact, we now are hearing from highly respected figures on the macroeconomic front that recession is all but certain. One of the world’s most respected global banking institutions recently revised their prediction of a mild recession – made only a few weeks ago – to say they now are expecting the U.S. to experience a significant downturn. And the former vice chair of the Federal Reserve recently suggested for the first time that recession is “inevitable.”

In my view, it’s worth taking note of these publicly declared projections from respected economic authorities in recent days and weeks that we’re in store for a major economic setback. And it’s also significant that Q1 GDP surprised practically everybody and shrank before the effects of rate hikes actually were felt. That certainly doesn’t help the case of those who contend we will see either no recession or one that proves relatively inconsequential.[6]