The persistent inflation has dealt a blow to the US economy in many ways. It led to tightening financial conditions, slowed industrial activities, and inhibited new investments. Also, the high inflation made consumers dig deeper into their pockets, including their savings, to sustain their lifestyles.
So far, the average inflation rate for the past 12 months stands at 6.5 %, which is better compared to the 7.1% figure for November. Despite that, the country’s GDP is growing, and there are signs that it will continue to grow. But before delving into why it is the case, let’s answer the question what is gdp?
GDP refers to the value of goods and services a country produces annually. Thus, in the fourth quarter of 2022, the U.S. GDP grew by 2.9%, meaning that the economy registered two consecutive growths in the last two quarters despite the soaring inflation. As a result, economists have reason to predict a continued GPD expansion in the first quarter of 2022. What reasons do they give to support the prediction?
1. Third and Fourth Quarter Results
As mentioned earlier, 2022 was a problematic year characterized by soaring inflation. The Ukrain -Russian war dealt a blow to the supply chain and slowed down manufacturing processes. It resulted into artificial shortages which spiked a sharp rise in prices. While many world countries resorted to subsidies to try to make life bearable, the Federal Reserve resorted to using the interest rate as a control measure to contain inflation. Consequently, the market interest rates in the US rose sharply, discouraging borrowing and spending.
After a few months, the policy bore fruit and brought the inflation rate down from 9% to 6.5%. Despite all these troubles, the US economy grew by 3.2%and 2.9% in the third and fourth quarters respectively. What does this imply?
Having two consecutive growths during turbulent times is only possible if the economy is resilient. So it means that the US economy is robust and will continue registering positive growth in 2023.
2. Increased Activities
As the inflation rate dips, the US economy is experiencing growth in many sectors. Government spending, consumer spending, and private inventory investment have witnessed upward growth. The growth is sufficient to offset the negative export and residential investment.
Note that the increase in private inventory is as a result of improvements in the performance of several sectors, including mining, manufacturing, utilities, and housing. Also, there was significant growth in the transport and travel sector. In addition, the motor vehicle industry experienced considerable growth. All these are signs that the economy and GDP will continue growing.
3. Tight Labor Market
The number of people that filed for unemployment benefits dipped in mid-January, indicating a solid labor market. This was unexpected, given the Federal Reserve’s effort to cool down the demand for workers. However, if the demand is not checked, it may result in unnecessary increases in wages and make it difficult to control inflation. .
Elsewhere, employees still hold tight on workers; hence the unemployment claims dropped by 15,000 from the figure registered in the week that ended January 14. Indeed, this level was the lowest since September, and economists attribute it to a strong economy and a continued GDP expansion.
4. Strong Consumer Spending
Consumer spending dipped at the beginning of December but picked up over the festive season through January. Online shopping and departmental store sales registered substantial increases as well. However, the US census bureau is yet to release the official figures. The January sales increased as consumers resumed their regular dining and shopping activities. The apparel sector benefited the most as consumers started preparing for social activities and traveling.
However, it is worth noting that the economy has yet to feel the full impact of rate tightening. So as long as this is the case, we expect the economy to grow. But once the pressure hits all businesses, it will likely check the growth.
5. The Huge Profit By Big Oil Companies
The big oil companies such as BP, Shell, Total energy, and Exxon Mobile made considerable profits in 2022. Cumulatively, the companies are expected to announce a whopping $190 billion profit. This is the highest profit ever announced by the companies. And given that it is coming against interrupted supply and high energy prices, things will be better once the bottlenecks are dealt with.
Generally, 2022 was a challenging year for the world economies. The Ukraine war and the Covid-19 insurgency in china interrupted supplies spiking basic commodities price increases. The spike resulted in inflation that almost choked the US economy. Experts predicted a recession at the start of 2023, but it has not happened. However, it is too early to celebrate since the full impact of tight monetary policy may fulfill the predictions.