Why this economy may be sturdier than it looks U.S. GDP shrank in the first few months of the year, but the economy may be sturdier than it looks.

Why this economy may be sturdier than it looks

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A MARTINEZ, HOST:

The U.S. economy has a lot going for it right now, but you might not know that from the GDP numbers that came out this morning. Commerce Department says the nation's gross domestic product shrank in the first three months of the year. But economists say those numbers do not tell the whole story. NPR's Scott Horsley joins us now to help fill in the missing pieces. Scott, last year, the economy was growing at the fastest pace in decades. What happened in the first quarter that caused such a sharp reversal?

SCOTT HORSLEY, BYLINE: Well, if you looked at today's report card, you might think that the economy had fallen into a ditch. The Commerce Department said GDP shrank in January, February, March at an annual rate of 1.4%. And that would be a big letdown after the really strong growth we saw last year. But it is not as worrisome as it might sound. That first-quarter slump is mainly due to a drop in exports and inventories and government spending. If you look at the real core of GDP, which is consumer spending and business investment, they've actually held up pretty well. Personal consumption grew at an annual rate of 2.7% in the first quarter. That's an acceleration from the end of the last year. Private investment's up as well. Certainly the omicron of coronavirus infections was a drag on the economy in the early weeks of 2022. But Ben Herzon, who's a senior economist at S&P Global Market Intelligence thinks we're in for a more upbeat spring and summer.

BEN HERZON: People are taking their masks off. People are getting back to consuming the services they were consuming before the pandemic. And that's a pretty powerful push that will help to propel consumer spending and GDP, broadly, higher into the second half of this year.

HORSLEY: We can see from some of the real-time data that people are eating out more. They're buying more airline tickets. What's more, the job market's still very strong. Unemployment's low. Wages are climbing. Certainly there are challenges in this economy, but the overall picture is pretty good.

MARTINEZ: What about inflation, though?

HORSLEY: Yeah, well, that's one of the big challenges, and it's a big reason that a lot of people tell pollsters they're gloomy about this economy, even though they're still spending pretty freely. You know, there's a nonprofit business mentoring service called SCORE that just did a big survey of small-business owners. They found more than half are raising their prices on average by about 11%. I talked to a business owner named Becky Rawls-Riley in Olathe, Kan. She makes and sells hats and head wraps that are popular with motorcyclists and gardeners. She has raised her prices a bit this year because she's paying her workers more, and her material costs have gone up. But so far, she says, sales have held up pretty well.

BECKY RAWLS-RILEY: When we talk about inflation impact in our business, there are some who will buy, who will buy, who will buy. If you wear a hat, you wear a hat, you wear a hat. Headbands - same thing. Some are watching their pennies.

HORSLEY: This past weekend, Rawls-Riley had a sales booth at the Tulip Festival in Wamego, Kan. She is glad to see more of those festivals back in business this year. They're a good marketing opportunity for her. Typically, she travels to craft fairs in seven states. She is thinking twice about some of the most distant festivals this year, though, because of the high cost of gasoline and hotels.

MARTINEZ: Yeah, can't blame her for that. I know the Fed has started raising interest rates in an effort to get a handle on the situation. How is that going to affect the economy?

HORSLEY: You know, it's already having an impact on the housing market. Mortgage rates are now above 5%, and that's going to weigh on home sales going forward. The Fed is expected to raise rates by another half percentage point next week. What the central bank is trying to do here is slow the economy enough to curb inflation but not so much as to tip it into recession. And that is, of course, a delicate balancing act. One thing that could - a lot of Americans, not all, but a lot of Americans are still sitting on a lot of extra savings, money they piled up when they couldn't spend during the pandemic, augmented in some cases by federal relief payments. And that's money that could help cushion the fallout from inflation and prop up spending in the months to come.

MARTINEZ: That's NPR's Scott Horsley. Scott, thanks a lot.

HORSLEY: You're welcome.

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