Economy Contracts in Q1 as Fed Attempts to Rein in Inflation

The US economy contracted in the first quarter for the first time since the coronavirus pandemic began.

Gross Domestic Product (GDP) fell by 1.4% annualized in Q1, which fell far below the consensus view that the economy would actually grow around 1% at an annual rate for the quarter. The major driver of the decline was an increase in the trade deficit, with imports surging from Q4 2021, while exports dropped from the same period. Imports are subtracted in GDP calculations, while exports are added. Inventories also decreased in Q1 after a buildup of inventories in the previous quarter.

While an economic contraction is not an ideal scenario, a deeper look reveals some more encouraging metrics. Consumer spending rose in Q1, with private demand rising 3.7%. This occurred even in the midst of accelerating inflation brought on existing economic conditions as well as the economic turmoil caused by the Russian invasion of Ukraine and the resulting financial sanctions.

While the Federal Reserve is often reluctant to raise interest rates amid a slowing economy, the latest numbers are unlikely to halt the Fed from raising interest rates this year in an attempt to tamp down on rising prices. Financial markets have experienced volatility the past few weeks as they price in the expected increases, which, by raising the cost of borrowing money, will slow down the economy, in turn reducing price increases. Besides reducing inflation, the Fed will also attempt to avoid a recession, which is defined as two consecutive quarters of economic contraction, though given the rates of inflation seen over the past year, this will remain a difficult balancing act.

 

Ketanji Brown Jackson Heads Towards Likely Confirmation

The Senate Judiciary Committee completed the Supreme Court confirmation hearings for US Appeals Court Judge Ketanji Brown Jackson last week, with Jackson likely heading towards confirmation to become the first black woman on the Supreme Court given Sen. Joe Manchin’s (D-WV) announcement that he will support her nomination.

Jackson, who was nominated to succeed retiring Justice Stephen Breyer, was first installed on the US District Court for the District of Columbia in 2013 by President Obama and was elevated to the Appeals Court for the DC Circuit in 2021 by President Biden. Prior to her service on the federal bench, Jackson was vice chair of the US Sentencing Commission and had worked as a federal public defender.

Jackson’s ascension to the Supreme Court would likely not have a major effect on the ideological makeup of the court, as she, widely perceived as a liberal jurist, would be replacing Breyer, another liberal jurist. One possible shift, however, would be in the court’s approach to certain criminal justice issues. Breyer was often deferential to prosecutors and police, while Jackson’s record does not show such a deference.

 

Manchin Reportedly Working to Revive Spending Package

Sen. Joe Manchin (D-WV) has given signals that he may be willing to negotiate on a slimmed down version of the previous Build Back Better bill, which he effectively killed in December 2021 after he announced his opposition to it on Fox News Sunday. This bill would likely focus on controlling drug prices, energy policy, and tax increases.

Any legislation he puts forth will still need the support of the 49 other Democratic senators (barring any GOP defections), including fellow moderate Kyrsten Sinema from Arizona. Sinema has been in the past been hesitant to support some of the tax increases proposed last year.

Russia's War in Ukraine Continues

The Russian invasion of Ukraine has completed its first month, and while President Vladimir Putin’s forces have failed to take Ukraine’s capital Kyiv or its second largest city Kharkiv, Russian forces have taken large areas of Ukraine's southeast. Russia so far has captured few large cities and has encountered fierce resistance throughout the country.

Meanwhile, sanctions from Western countries continue to affect Russia’s economy, preventing it from easily selling its exports, including oil and food.

The current state of the war is much different from the consensus just before the war started, that the Russian military would be able to relatively quickly topple the Ukrainian government and control large swaths of territory. Any hope for a Ukrainian victory would likely lie in a long-term insurgency similar to Afghanistan in the aftermath of the Soviet invasion in the 1980s. Rather, the strong Ukrainian resistance has kept the government in power and prevented the seizure of many large cities, even though Russia has managed to control territory along the border and in the east and south of the country.

Putin’s actions in Ukraine have been characterized as war crimes given his military’s targeting of civilian neighborhoods. Russia’s attacks on civilian neighborhoods represent a dark turn in the conflict as following their failure to occupy most of Ukraine's major cities.

Russia last week announced they will shift focus to the eastern front, where Russia has been helping separatists since 2014 fight to remove Ukrainian control. Western nations have responded incredulously to the statement, skeptical of whether Russia will actually shift focus or will try a new offensive to capture Kyiv and other major cities.

 

Biden Struggles to Gain Political Footing Ahead of Midterms

President Joe Biden’s approval continues to lag as several domestic and foreign policy challenges cast a shadow over his presidency.

While coronavirus cases have been dropping nationwide, inflation remains a top issue among voters ahead of the midterm elections that will determine control of Congress. Biden’s approval rating stands at 40.7%, according to the 538 polling aggregate, around the same level as former President Donald Trump’s average rating when he was president.

The recent Russian invasion of Ukraine also poses a challenge for the administration. Biden faces pressure from both those arguing for a more interventionist stance as well as those arguing for a more hands-off approach.

A possible positive development for the president is his nomination of Ketanji Brown Jackson to fill the vacancy on the Supreme Court caused by the retirement of Stephen Breyer. While Jackson’s ascension of the court will not cause any substantial change in the ideological makeup of the court, Democrats hope the first black woman on the Supreme Court will excite their base.