WEBVTT 00:02.466 --> 00:04.700 align:left position:10% line:71% size:80% JUDY WOODRUFF: As we reported, the U.S. economy slowed down over the first three months of the 00:04.700 --> 00:09.700 align:left position:10% line:77% size:80% year, the first time it has contracted since the pandemic brought it to a screeching halt. 00:11.133 --> 00:13.733 align:left position:10% line:83% size:80% There have been other troubling signs, most notably inflation 00:13.733 --> 00:16.400 align:left position:20% line:83% size:70% and concerns over the rise in borrowing costs. 00:16.400 --> 00:18.633 align:left position:20% line:83% size:70% Let's get some analysis of what to make of this. 00:18.633 --> 00:23.433 align:left position:10% line:77% size:80% Diane Swonk joins us again from the economic services firm Grant Thornton. 00:23.433 --> 00:26.066 align:left position:20% line:83% size:70% Diane Swonk, welcome back to the "NewsHour." 00:26.066 --> 00:28.866 align:left position:20% line:83% size:70% So, last year, we saw roaring growth, 00:28.866 --> 00:31.900 align:left position:10% line:83% size:80% first quarter of this year, a slowdown. What is behind this? 00:31.900 --> 00:36.900 align:left position:10% line:77% size:80% DIANE SWONK, Grant Thornton: Well, we really saw was sort of a tale of two economies. 00:38.833 --> 00:42.500 align:left position:10% line:77% size:80% We saw the domestic economy, the consumer, homebuying, building and business investment 00:44.433 --> 00:49.400 align:left position:10% line:77% size:80% all accelerated in the first quarter off the fourth quarter, while the trade deficit 00:51.400 --> 00:55.633 align:left position:10% line:77% size:80% absolutely ballooned. We saw exports fall at their fastest pace since the onset 00:57.600 --> 01:00.766 align:left position:10% line:77% size:80% of the pandemic in 2020, as the -- everything from the Omicron wave to the war in Ukraine 01:02.933 --> 01:07.833 align:left position:10% line:77% size:80% and new lockdowns in China take a bigger toll on growth abroad than at home. 01:07.833 --> 01:11.900 align:left position:10% line:77% size:80% We also saw continued double-digit gains in imports here in the United States, 01:11.900 --> 01:16.900 align:left position:10% line:77% size:80% as we were trying to bring in and catch up on losses from the Delta wave last summer. 01:18.933 --> 01:23.133 align:left position:10% line:77% size:80% So, where we saw the strength was really the pillars of the U.S. economy, the consumer, 01:25.133 --> 01:28.133 align:left position:10% line:77% size:80% the housing market, although all-cash buyers are clearly pushing out first-time buyers, 01:28.133 --> 01:31.200 align:left position:20% line:83% size:70% and business investment actually accelerating. 01:31.200 --> 01:36.200 align:left position:10% line:83% size:80% That resilience that we saw off of 1.7 million jobs generated, 01:38.166 --> 01:41.933 align:left position:10% line:77% size:80% something that was like what we would do in a year in the 2010s, in one quarter, 01:43.933 --> 01:47.466 align:left position:10% line:77% size:80% that helped to buoy the domestic economy, even as the foreign side of the economy imploded. 01:49.533 --> 01:53.933 align:left position:10% line:77% size:80% And government spending also fell quite dramatically, as defense spending was cut. 01:55.400 --> 01:57.466 align:left position:10% line:83% size:80% Now, we know that's going to be reversing course soon too. 01:57.466 --> 02:00.500 align:left position:10% line:83% size:80% JUDY WOODRUFF: So, we look at all these different indicators. 02:00.500 --> 02:05.466 align:left position:10% line:77% size:80% Which ones do we look to for the most accurate picture of what's really going on in the economy? 02:07.866 --> 02:12.466 align:left position:10% line:71% size:80% DIANE SWONK: Well, from the perspective of the Federal Reserve, what really matters most is that 02:12.466 --> 02:15.600 align:left position:20% line:83% size:70% inflation in the data today as well hit 02:15.600 --> 02:20.600 align:left position:10% line:77% size:80% a 40-year high at the same time that domestic demand actually accelerated. 02:22.600 --> 02:26.200 align:left position:10% line:77% size:80% That's important for the Fed, because that resilience, as good as it, is -- also means 02:28.666 --> 02:31.866 align:left position:10% line:71% size:80% that it's allowing inflation to continue to flare. And that's something that Fed is really concerned 02:34.300 --> 02:37.466 align:left position:10% line:71% size:80% about. It would like to see demand slow down to meet a supply-constrained global economy. 02:39.400 --> 02:43.233 align:left position:10% line:77% size:80% The problem is, to do that, you got to hammer on demand pretty hard. And the chances of 02:45.166 --> 02:48.333 align:left position:10% line:77% size:80% getting things just right, like -- in the Goldilocks and getting the porridge just right, 02:48.333 --> 02:53.300 align:left position:10% line:77% size:80% not as easy as just moving around the table. And Goldilocks only exists in fairy tales. 02:54.666 --> 02:57.866 align:left position:10% line:83% size:80% JUDY WOODRUFF: And inflation, you mentioned, Diane, 02:57.866 --> 03:01.500 align:left position:10% line:83% size:80% there are more numbers coming tomorrow. We can look. The Fed 03:01.500 --> 03:06.300 align:left position:10% line:77% size:80% chairman, Jay Powell, himself has said they may be looking at a half-point increase. 03:07.766 --> 03:10.700 align:left position:10% line:83% size:80% How much is that expected to slow down the economy? 03:10.700 --> 03:15.700 align:left position:10% line:77% size:80% DIANE SWONK: Well, we're looking to see some of the fastest rate increases since 1994, 03:18.233 --> 03:22.333 align:left position:10% line:71% size:80% if not faster, because, in addition to what will be two back-to-back likely half-percent increases 03:24.766 --> 03:28.600 align:left position:10% line:71% size:80% in May and June, we're also going to see the Fed start to reduce that mammoth balance sheet it has. 03:30.600 --> 03:33.633 align:left position:10% line:77% size:80% And, really, that's kind of an unknown, as it reverses course on its balance sheet. But 03:35.633 --> 03:38.200 align:left position:10% line:77% size:80% it's kind of like driving through -- using the rearview mirror. You can't see all the 03:38.200 --> 03:42.900 align:left position:10% line:71% size:80% obstacles you might hit. That could be the fastest tightening cycle we have seen since the 1980s 03:45.266 --> 03:49.833 align:left position:10% line:83% size:80% to deal with 1980s levels of inflation. That's really hard. 03:49.833 --> 03:54.333 align:left position:10% line:77% size:80% And what we're worried about is that the U.S. economy slows to a stall speed 03:54.333 --> 03:59.300 align:left position:10% line:77% size:80% in the second half the year, where we actually don't see this underlying domestic demand 03:59.300 --> 04:03.600 align:left position:10% line:77% size:80% and we actually start to see, by year end, a rise in the unemployment rate. 04:03.600 --> 04:06.200 align:left position:10% line:83% size:80% JUDY WOODRUFF: And when you say slow down, of course, 04:06.200 --> 04:10.600 align:left position:10% line:71% size:80% there is starting to be discussion about whether - - what are the prospects for another recession? 04:13.500 --> 04:18.500 align:left position:10% line:77% size:80% What are the signals we should be looking at to see whether that is on the horizon or not? 04:20.466 --> 04:24.100 align:left position:10% line:77% size:80% DIANE SWONK: Well, really, the issue is whether or not we can keep -- slow down 04:26.100 --> 04:30.833 align:left position:10% line:77% size:80% the demand for workers. It's up 60 -- more than 60 percent since February of 2020. The 04:32.033 --> 04:35.433 align:left position:20% line:83% size:70% supply of workers is not up that much since 2020. 04:35.433 --> 04:40.400 align:left position:20% line:71% size:70% There's just no way we can possibly see -- even if we got a lot more workers participating in 04:40.400 --> 04:44.700 align:left position:10% line:77% size:80% the labor force, which has come back, to get that -- to meet that demand. And so 04:44.700 --> 04:49.700 align:left position:10% line:77% size:80% what the Fed would like to do is cool those job openings a bit to bring it down closer to supply. 04:51.700 --> 04:56.266 align:left position:10% line:77% size:80% It's over a five million gap right now. What I worry about is that we're not going to be able 04:58.800 --> 05:01.800 align:left position:10% line:71% size:80% to do that without raising the unemployment rate as well and increasing the supply of workers. And 05:04.400 --> 05:07.000 align:left position:10% line:71% size:80% I think the probability of recession is very high in the second half of the year and as we move into 05:08.866 --> 05:11.733 align:left position:10% line:77% size:80% 2023. In fact, we're forecasting what's called a growth recession, 05:11.733 --> 05:16.733 align:left position:10% line:77% size:80% which is when growth is not enough to hold unemployment down, and it continues to rise 05:18.800 --> 05:22.100 align:left position:10% line:77% size:80% in 2023 to derail the inflation we have and get it back to being insignificant to most consumers. 05:23.833 --> 05:26.300 align:left position:10% line:89% size:80% JUDY WOODRUFF: But, meantime, 05:26.300 --> 05:29.033 align:left position:10% line:71% size:80% all eyes are -- or, I should say, many eyes are on the Federal Reserve and what it does. 05:29.033 --> 05:33.833 align:left position:20% line:89% size:70% DIANE SWONK: Absolutely. 05:33.833 --> 05:38.533 align:left position:10% line:77% size:80% The Federal Reserve is going to be driving this. And the Federal Reserve is forcibly 05:38.533 --> 05:41.600 align:left position:10% line:77% size:80% going to be bring inflation down. They're going to be committing to that 05:41.600 --> 05:45.600 align:left position:10% line:77% size:80% again and doubling down on it next week. And I think that's a very important 05:45.600 --> 05:50.466 align:left position:10% line:77% size:80% message to watch, is, how aggressive does the Fed can want to continue to be 05:50.466 --> 05:54.933 align:left position:10% line:77% size:80% after this initial liftoff, which is already going to be very aggressive? 05:54.933 --> 05:58.466 align:left position:10% line:77% size:80% They have got credibility on the line here. They're behind the curve on inflation. 05:58.466 --> 06:01.500 align:left position:10% line:83% size:80% JUDY WOODRUFF: Diane Swonk with Grant Thornton. 06:01.500 --> 06:05.833 align:left position:20% line:89% size:70% Thank you, Diane.