Economic Forecasts

GDP: Growth Will Slow, but Recession to be Averted

Kiplinger’s latest forecast for the GDP growth rate

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The economy’s growth will slow this year and next, but recession is likely to be averted. The headwinds are many: The price of oil is up 50% so far this year, in part because of the Ukraine war, which is pushing up all other energy prices, as well. The war is also raising the price of food and creating shortages of other raw materials. Supply shortage issues left over from last year are still cropping up. A shortage of computer chips is limiting the production of new cars and trucks, and is expected to last into next year. The Federal Reserve intends to hike short-term interest rates the rest of this year to fight inflation. Long-term rates have already jumped, pushing up mortgage rates to 5.35%, nearly double what they were at the end of last year. U.S. purchases of imports are far outstripping the demand for U.S. exports, worsening the trade deficit. Slowing growth in Europe and China, plus the strong rise in the value of the U.S. dollar, is making the trade deficit problem worse. Inflation may discourage some consumer spending.

But there are positives as well: Consumers have $2.75 trillion in excess savings built up during the past two years that will enable spending to continue, especially on services such as entertainment and travel that many have skipped during the pandemic. The slowing economy will take the edge off the shortage of workers and the overheated housing and motor vehicle markets, which could be good for bringing inflation under control. Workers are not being laid off, which is characteristic of actual recession. Despite the rise in mortgage rates, housing demand is likely to stay strong. A pickup in overall goods demand should take place once shortages are addressed. Business investment is still showing strength, and businesses are still rebuilding inventories following the shipping crunch last year.

On balance, GDP growth will likely slow to 2.5% in 2022, and slow further to 1.9% in 2023. Growth in some quarters could be below 1.5%, but an actual contraction appears unlikely. The economy did contract 1.5% in the first quarter of 2022, but this was a small reversion after the previous quarter’s growth of 6.9%.

Corporate profit margins eased a bit in the first quarter, from 15% to 12%: Still a high level.  Profit margins will likely shrink this year because inflation and big wage increases are increasing business costs.

Source: Department of Commerce: GDP Data

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