US economy facing a momentum problem

New York: In America, a recession is officially determined by eight economists who deliberate in private. But a recession is commonly defined by analysts as two consecutive negative quarters of gross domestic product growth, CNN reported.

Real GDP shrank in the first quarter of 2022, but monthly data suggests there may have been solid growth in the second quarter and spending picked up in Covid-impacted sectors like travel and entertainment.

The third quarter, however, isn’t looking so hot, says David Kelly, chief global strategist at JP Morgan Asset Management. He sees storm clouds gathering that threaten to seriously temper economic momentum. 

David Bianco, chief investment officer for the Americas at DWS Group, says his team has already trimmed GDP forecasts several times over the course of the year.

“The underlying problem is that inflation has been a function of not enough supply versus too much demand,” wrote Ivan Feinseth of Tigress Financial Partners in a note.  

But faltering demand could become a bigger problem. An end to stimulus checks, enhanced unemployment benefits, enhanced child tax credits and other programs that aided lower and middle-income households during the height of the pandemic could cause a drag on spending in the near future, said Kelly.

Kelly predicts that the end of these stimulus programs could lead to a drop in the federal budget deficit from 12.4% of GDP in 2021 to less than 4% of GDP in 2022. That would be the largest decline since the end of World War II. 

No matter where you fall on matters of the rapidly growing US national debt, a decrease in stimulus spending will likely slow the economy, at least in the short term. 

Image courtesy of thesatimes

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