A recession looming – US economy shrank by 0.2% in the March quarter

According to revised estimate by US Department of Commerce, US economy contracted by 0.2% year-on-year (y-o-y) in the first quarter instead of the previously reported 0.3%. In the December quarter the US economy had expanded by 2.4%. If the economy contracts in June quarter too, then it will technically enter a recession. A recession happens when the GDP of an economy contracts in two consecutive quarters.

Consumer spending, government spending shrank in the quarter

The main reasons for contraction in the March quarter GDP were decline in consumer spending, increase in imports, and decline in government spending. The GDP of a country is made up of four components. These are Consumption, Investment, Government expenditure and Net exports. Investments and exports increased in the quarter.

Inflation in the first quarter in US was at 3.6% y-o-y. The US Department of Commerce has not changed this number in its revised estimate. The challenge now before US Federal Reserve is how to give boost to the US economy without putting further upward pressure on inflation. If it goes for an interest rate cut then it will put some upward pressure on inflation. Higher tariff policy of President Trump is expected to increase inflation in US significantly.

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Source: US Department of Commerce