JUDY WOODRUFF: As we
reported, the U.S. economy
slowed down over the
first three months of the
year, the first time it has
contracted since the pandemic
brought it to a screeching halt.
There have been other troubling
signs, most notably inflation
and concerns over the
rise in borrowing costs.
Let's get some analysis
of what to make of this.
Diane Swonk joins us again
from the economic services
firm Grant Thornton.
Diane Swonk, welcome
back to the "NewsHour."
So, last year, we
saw roaring growth,
first quarter of this year, a
slowdown. What is behind this?
DIANE SWONK, Grant Thornton:
Well, we really saw was sort
of a tale of two economies.
We saw the domestic economy,
the consumer, homebuying,
building and business investment
all accelerated in the first
quarter off the fourth quarter,
while the trade deficit
absolutely ballooned. We
saw exports fall at their
fastest pace since the onset
of the pandemic in 2020, as the
-- everything from the Omicron
wave to the war in Ukraine
and new lockdowns in China
take a bigger toll on
growth abroad than at home.
We also saw continued
double-digit gains in imports
here in the United States,
as we were trying to bring in
and catch up on losses from
the Delta wave last summer.
So, where we saw the strength
was really the pillars of the
U.S. economy, the consumer,
the housing market, although
all-cash buyers are clearly
pushing out first-time buyers,
and business investment
actually accelerating.
That resilience that we saw off
of 1.7 million jobs generated,
something that was like what
we would do in a year in
the 2010s, in one quarter,
that helped to buoy the domestic
economy, even as the foreign
side of the economy imploded.
And government spending also
fell quite dramatically, as
defense spending was cut.
Now, we know that's going to
be reversing course soon too.
JUDY WOODRUFF: So, we look at
all these different indicators.
Which ones do we look to for the
most accurate picture of what's
really going on in the economy?
DIANE SWONK: Well, from
the perspective of the
Federal Reserve, what
really matters most is that
inflation in the data
today as well hit
a 40-year high at the same
time that domestic demand
actually accelerated.
That's important for the Fed,
because that resilience, as
good as it, is -- also means
that it's allowing inflation
to continue to flare.
And that's something that
Fed is really concerned
about. It would like to
see demand slow down to
meet a supply-constrained
global economy.
The problem is, to do that,
you got to hammer on demand
pretty hard. And the chances of
getting things just right,
like -- in the Goldilocks and
getting the porridge just right,
not as easy as just moving
around the table. And Goldilocks
only exists in fairy tales.
JUDY WOODRUFF: And inflation,
you mentioned, Diane,
there are more numbers coming
tomorrow. We can look. The Fed
chairman, Jay Powell, himself
has said they may be looking
at a half-point increase.
How much is that expected
to slow down the economy?
DIANE SWONK: Well, we're looking
to see some of the fastest
rate increases since 1994,
if not faster, because,
in addition to what will
be two back-to-back likely
half-percent increases
in May and June, we're also
going to see the Fed start
to reduce that mammoth
balance sheet it has.
And, really, that's kind of an
unknown, as it reverses course
on its balance sheet. But
it's kind of like driving
through -- using the rearview
mirror. You can't see all the
obstacles you might hit.
That could be the fastest
tightening cycle we have
seen since the 1980s
to deal with 1980s levels of
inflation. That's really hard.
And what we're worried about
is that the U.S. economy
slows to a stall speed
in the second half the year,
where we actually don't see
this underlying domestic demand
and we actually start to
see, by year end, a rise
in the unemployment rate.
JUDY WOODRUFF: And when you
say slow down, of course,
there is starting to be
discussion about whether
- - what are the prospects
for another recession?
What are the signals we should
be looking at to see whether
that is on the horizon or not?
DIANE SWONK: Well, really,
the issue is whether or not
we can keep -- slow down
the demand for workers. It's
up 60 -- more than 60 percent
since February of 2020. The
supply of workers is not
up that much since 2020.
There's just no way we
can possibly see -- even
if we got a lot more
workers participating in
the labor force, which has
come back, to get that --
to meet that demand. And so
what the Fed would like to do is
cool those job openings a bit to
bring it down closer to supply.
It's over a five million gap
right now. What I worry about is
that we're not going to be able
to do that without raising
the unemployment rate as
well and increasing the
supply of workers. And
I think the probability
of recession is very high
in the second half of the
year and as we move into
2023. In fact, we're
forecasting what's called
a growth recession,
which is when growth is not
enough to hold unemployment
down, and it continues to rise
in 2023 to derail the inflation
we have and get it back to being
insignificant to most consumers.
JUDY WOODRUFF: But, meantime,
all eyes are -- or, I
should say, many eyes
are on the Federal
Reserve and what it does.
DIANE SWONK: Absolutely.
The Federal Reserve is going
to be driving this. And the
Federal Reserve is forcibly
going to be bring inflation
down. They're going to
be committing to that
again and doubling down on
it next week. And I think
that's a very important
message to watch, is, how
aggressive does the Fed
can want to continue to be
after this initial liftoff,
which is already going
to be very aggressive?
They have got credibility
on the line here. They're
behind the curve on inflation.
JUDY WOODRUFF: Diane
Swonk with Grant Thornton.
Thank you, Diane.