1 00:00:02,466 --> 00:00:04,700 JUDY WOODRUFF: As we reported, the U.S. economy slowed down over the first three months of the 2 00:00:04,700 --> 00:00:09,700 year, the first time it has contracted since the pandemic brought it to a screeching halt. 3 00:00:11,133 --> 00:00:13,733 There have been other troubling signs, most notably inflation 4 00:00:13,733 --> 00:00:16,400 and concerns over the rise in borrowing costs. 5 00:00:16,400 --> 00:00:18,633 Let's get some analysis of what to make of this. 6 00:00:18,633 --> 00:00:23,433 Diane Swonk joins us again from the economic services firm Grant Thornton. 7 00:00:23,433 --> 00:00:26,066 Diane Swonk, welcome back to the "NewsHour." 8 00:00:26,066 --> 00:00:28,866 So, last year, we saw roaring growth, 9 00:00:28,866 --> 00:00:31,900 first quarter of this year, a slowdown. What is behind this? 10 00:00:31,900 --> 00:00:36,900 DIANE SWONK, Grant Thornton: Well, we really saw was sort of a tale of two economies. 11 00:00:38,833 --> 00:00:42,500 We saw the domestic economy, the consumer, homebuying, building and business investment 12 00:00:44,433 --> 00:00:49,400 all accelerated in the first quarter off the fourth quarter, while the trade deficit 13 00:00:51,400 --> 00:00:55,633 absolutely ballooned. We saw exports fall at their fastest pace since the onset 14 00:00:57,600 --> 00:01:00,766 of the pandemic in 2020, as the -- everything from the Omicron wave to the war in Ukraine 15 00:01:02,933 --> 00:01:07,833 and new lockdowns in China take a bigger toll on growth abroad than at home. 16 00:01:07,833 --> 00:01:11,900 We also saw continued double-digit gains in imports here in the United States, 17 00:01:11,900 --> 00:01:16,900 as we were trying to bring in and catch up on losses from the Delta wave last summer. 18 00:01:18,933 --> 00:01:23,133 So, where we saw the strength was really the pillars of the U.S. economy, the consumer, 19 00:01:25,133 --> 00:01:28,133 the housing market, although all-cash buyers are clearly pushing out first-time buyers, 20 00:01:28,133 --> 00:01:31,200 and business investment actually accelerating. 21 00:01:31,200 --> 00:01:36,200 That resilience that we saw off of 1.7 million jobs generated, 22 00:01:38,166 --> 00:01:41,933 something that was like what we would do in a year in the 2010s, in one quarter, 23 00:01:43,933 --> 00:01:47,466 that helped to buoy the domestic economy, even as the foreign side of the economy imploded. 24 00:01:49,533 --> 00:01:53,933 And government spending also fell quite dramatically, as defense spending was cut. 25 00:01:55,400 --> 00:01:57,466 Now, we know that's going to be reversing course soon too. 26 00:01:57,466 --> 00:02:00,500 JUDY WOODRUFF: So, we look at all these different indicators. 27 00:02:00,500 --> 00:02:05,466 Which ones do we look to for the most accurate picture of what's really going on in the economy? 28 00:02:07,866 --> 00:02:12,466 DIANE SWONK: Well, from the perspective of the Federal Reserve, what really matters most is that 29 00:02:12,466 --> 00:02:15,600 inflation in the data today as well hit 30 00:02:15,600 --> 00:02:20,600 a 40-year high at the same time that domestic demand actually accelerated. 31 00:02:22,600 --> 00:02:26,200 That's important for the Fed, because that resilience, as good as it, is -- also means 32 00:02:28,666 --> 00:02:31,866 that it's allowing inflation to continue to flare. And that's something that Fed is really concerned 33 00:02:34,300 --> 00:02:37,466 about. It would like to see demand slow down to meet a supply-constrained global economy. 34 00:02:39,400 --> 00:02:43,233 The problem is, to do that, you got to hammer on demand pretty hard. And the chances of 35 00:02:45,166 --> 00:02:48,333 getting things just right, like -- in the Goldilocks and getting the porridge just right, 36 00:02:48,333 --> 00:02:53,300 not as easy as just moving around the table. And Goldilocks only exists in fairy tales. 37 00:02:54,666 --> 00:02:57,866 JUDY WOODRUFF: And inflation, you mentioned, Diane, 38 00:02:57,866 --> 00:03:01,500 there are more numbers coming tomorrow. We can look. The Fed 39 00:03:01,500 --> 00:03:06,300 chairman, Jay Powell, himself has said they may be looking at a half-point increase. 40 00:03:07,766 --> 00:03:10,700 How much is that expected to slow down the economy? 41 00:03:10,700 --> 00:03:15,700 DIANE SWONK: Well, we're looking to see some of the fastest rate increases since 1994, 42 00:03:18,233 --> 00:03:22,333 if not faster, because, in addition to what will be two back-to-back likely half-percent increases 43 00:03:24,766 --> 00:03:28,600 in May and June, we're also going to see the Fed start to reduce that mammoth balance sheet it has. 44 00:03:30,600 --> 00:03:33,633 And, really, that's kind of an unknown, as it reverses course on its balance sheet. But 45 00:03:35,633 --> 00:03:38,200 it's kind of like driving through -- using the rearview mirror. You can't see all the 46 00:03:38,200 --> 00:03:42,900 obstacles you might hit. That could be the fastest tightening cycle we have seen since the 1980s 47 00:03:45,266 --> 00:03:49,833 to deal with 1980s levels of inflation. That's really hard. 48 00:03:49,833 --> 00:03:54,333 And what we're worried about is that the U.S. economy slows to a stall speed 49 00:03:54,333 --> 00:03:59,300 in the second half the year, where we actually don't see this underlying domestic demand 50 00:03:59,300 --> 00:04:03,600 and we actually start to see, by year end, a rise in the unemployment rate. 51 00:04:03,600 --> 00:04:06,200 JUDY WOODRUFF: And when you say slow down, of course, 52 00:04:06,200 --> 00:04:10,600 there is starting to be discussion about whether - - what are the prospects for another recession? 53 00:04:13,500 --> 00:04:18,500 What are the signals we should be looking at to see whether that is on the horizon or not? 54 00:04:20,466 --> 00:04:24,100 DIANE SWONK: Well, really, the issue is whether or not we can keep -- slow down 55 00:04:26,100 --> 00:04:30,833 the demand for workers. It's up 60 -- more than 60 percent since February of 2020. The 56 00:04:32,033 --> 00:04:35,433 supply of workers is not up that much since 2020. 57 00:04:35,433 --> 00:04:40,400 There's just no way we can possibly see -- even if we got a lot more workers participating in 58 00:04:40,400 --> 00:04:44,700 the labor force, which has come back, to get that -- to meet that demand. And so 59 00:04:44,700 --> 00:04:49,700 what the Fed would like to do is cool those job openings a bit to bring it down closer to supply. 60 00:04:51,700 --> 00:04:56,266 It's over a five million gap right now. What I worry about is that we're not going to be able 61 00:04:58,800 --> 00:05:01,800 to do that without raising the unemployment rate as well and increasing the supply of workers. And 62 00:05:04,400 --> 00:05:07,000 I think the probability of recession is very high in the second half of the year and as we move into 63 00:05:08,866 --> 00:05:11,733 2023. In fact, we're forecasting what's called a growth recession, 64 00:05:11,733 --> 00:05:16,733 which is when growth is not enough to hold unemployment down, and it continues to rise 65 00:05:18,800 --> 00:05:22,100 in 2023 to derail the inflation we have and get it back to being insignificant to most consumers. 66 00:05:23,833 --> 00:05:26,300 JUDY WOODRUFF: But, meantime, 67 00:05:26,300 --> 00:05:29,033 all eyes are -- or, I should say, many eyes are on the Federal Reserve and what it does. 68 00:05:29,033 --> 00:05:33,833 DIANE SWONK: Absolutely. 69 00:05:33,833 --> 00:05:38,533 The Federal Reserve is going to be driving this. And the Federal Reserve is forcibly 70 00:05:38,533 --> 00:05:41,600 going to be bring inflation down. They're going to be committing to that 71 00:05:41,600 --> 00:05:45,600 again and doubling down on it next week. And I think that's a very important 72 00:05:45,600 --> 00:05:50,466 message to watch, is, how aggressive does the Fed can want to continue to be 73 00:05:50,466 --> 00:05:54,933 after this initial liftoff, which is already going to be very aggressive? 74 00:05:54,933 --> 00:05:58,466 They have got credibility on the line here. They're behind the curve on inflation. 75 00:05:58,466 --> 00:06:01,500 JUDY WOODRUFF: Diane Swonk with Grant Thornton. 76 00:06:01,500 --> 00:06:05,833 Thank you, Diane.