GDP in Q1 worse than estimated – what this means for interest rates

Recession risks heat up as Fed raises rates

The final estimate for the GDP in the first quarter of 2022 showed the contraction was worse than originally thought.  (iStock)

The U.S. economy contracted more than previously thought in the first quarter of 2022, according to the third and final estimate from the Bureau of Economic Analysis (BEA)

Real gross domestic product (GDP) contracted by 1.6% in the first quarter, more than the previously estimated 1.5% contraction, according to the BEA. The change in the third estimate is primarily due to a revision to personal consumption expenditures (PCE) that was partly offset by an upward revision to private inventory investment. For comparison, in the fourth quarter of 2021, GDP increased by 6.9%. 

In fact, this contraction marks the first GDP decrease since the second quarter of 2020, when the U.S. was in the middle of the COVID-19 recession. 

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Economists weigh in on recession possibility

A recession occurs when the economy sees two consecutive quarters of economic contractions. After the decrease in the first quarter of this year, all eyes will be on the next GDP reading — to be released on July 28th — to determine if the U.S. is currently in a recession. 

Gary Black, managing partner of The Future Fund LLC, shared his reaction to the first quarter’s GDP reading on Twitter.

"US final 1Q GDP -1.6%, putting economy on track for back to back negative qtrly GDP readings, which is a recession," Black tweeted. "Fed’s aggressive tightening policy to fight Covid-driven inflation that is already in retreat will likely cause Fed to pause rate hikes after July 50-75bp increase"

However, another economist remained optimistic. Mike Schenk, Credit Union National Association’s (CUNA) chief economist, said in a recent economic update that while interest rates are rising and inflation is at a 40-year high, he remains "upbeat" about the possibility of a recession. 

"If you forced me to put a percentage on prospects for recession, I would say, at the moment, maybe somewhere in the neighborhood of 35% to 40%," Schenk said. "We are looking at all this data on an ongoing basis in real-time, adjusting our outlook based on that. But, at the moment, I'm still relatively upbeat."

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Fed likely to continue raising rates

Despite the struggling economy and increased risk of recession, inflation remains high and could push the Federal Reserve to continue raising interest rates in order to bring it back down. 

At its June meeting, the Federal Reserve raised interest rates by 75 basis points, the highest rate hike since 1994. Prior to that, the Federal Reserve raised interest rates by 50 basis points in May and by 25 points in March. The Fed is also expected to raise rates several more times this year and into 2023. 

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