Why This Economy May Be Stronger Than It Seems

From inflation to war in Ukraine, there seems to be plenty to worry about the economy these days, but things are looking pretty good for the busy Haya Hotel in Tampa, Florida.

Even with gas prices exceeding $4 a gallon, people are commuting from neighboring states and flocking to the hotel.

“They saved their money during the pandemic, and now they want to get away from it all, wherever that takes them,” says hotel general manager Peter Wright.

It may not be obvious when a new economic bulletin is released on Thursday. The Commerce Department is expected to see little to no growth – or maybe even a contraction – in the country’s gross domestic product for the first three months of this year, a stark contrast to the final months of 2021, which saw one of the fastest growths in decades.

But economists say it’s not as worrisome as it sounds. Consumers continue to spend freely and businesses continue to invest, despite the sharp decline in overall GDP growth.

“We shouldn’t take this as a signal of the direction of the economy,” said Ben Herzon, senior US economist at S&P Global Market Intelligence. “If we peel back a few layers and just look at underlying domestic demand, the economy seems to be picking up a bit.”

Take Tampa. More than three-quarters of hotel rooms in the city were booked as of mid-April, surpassing pre-pandemic levels, according to hotel analysts STR.

Strong demand pushed the national average price of a hotel room up more than 14% compared to 2019.

“We also see a lot of stays,” Wright says. “There was a lot of pent-up demand, so we’re seeing a lot of locals coming in for a few nights and enjoying the restaurant and the pool. They’re looking to spend some money.”

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People stand in a security line at New York’s John F. Kennedy International Airport on April 19.

“Buy and Buy and Buy”

While the omicron wave of coronavirus infections discouraged some people from traveling and eating out in the first few weeks of the year, that gave way to what Herzon calls a “COVID spring.”

“People are taking their masks off,” he says. “They’re starting to consume the services they were consuming before the pandemic again. It’s a pretty powerful push that will help propel consumer spending – and GDP in general – higher in the second half of the year. ”

At the Tulip Festival in Wamego, Kansas, this past weekend, Becky Rawls-Riley was showcasing a colorful collection of custom hats and scarves that she makes.

“Everybody’s back, which is great,” she says.

Craft festivals are returning after a one- or two-year hiatus due to the COVID-19 pandemic, and it’s a relief for Rawls-Riley, who depends on the events for sales and customer feedback.

Sales were “gung-ho” in February, she said, but looked a little weaker in March and April.

“Some will buy and buy and buy,” she says, while others “watch their pennies.”

Fatboy Slim performs onstage at the Coachella Valley Music and Arts Festival in Indio, California on April 24.  Festivals and other gatherings are returning despite the lingering COVID-19 pandemic.

Matt Winkelmeyer/Getty Images for Coachella

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Getty Images for Coachella

Fatboy Slim performs onstage at the Coachella Valley Music and Arts Festival in Indio, California on April 24. Festivals and other gatherings are returning despite the lingering COVID-19 pandemic.

All is not rosy, of course

This does not mean that the economy is without challenges. Supply chains are still tangled and employers are still struggling to find enough staff.

Rawls-Riley, for example, invested in new displays this year, as well as industrial sewing equipment, but both have been delayed by supply chain bottlenecks.

“If you can make a product but you can’t display it for someone to see what you have, you’re in trouble,” she says. It also raised its prices to compensate for the rising costs of cotton, polyester and spandex, as well as higher wages for its employees.

“You can’t maintain your price forever,” she says. “It’s just not possible.”

A survey of small business owners by SCORE, a nonprofit mentoring service, found that two-thirds faced rising costs from vendors and suppliers and more than half had raised their own prices, on average about 11%.

At the Haya Hotel, Wright also had to deal with rising expenses and the challenge of recruiting workers. Hotels and restaurants have been adding workers at a rapid pace in recent months, but the industry still employs about 1.5 million fewer people than before the pandemic.

“A lot of people have left our industry for a lot of reasons,” says Wright. “We have to be more creative than we have ever been in the past because there is such a shortage in the hospitality industry.”

A shopper selects a potato at a supermarket in Rosemead, California on April 21.  Inflation remains a major concern for the Federal Reserve.

Frederic J. Brown/AFP via Getty Images

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AFP via Getty Images

A shopper selects a potato at a supermarket in Rosemead, California on April 21. Inflation remains a major concern for the Federal Reserve.

Inflation is always a headache

With strong demand and a tight labor market, the US economy is considerably hotter than Thursday’s GDP figure suggests – too hot, in fact, for the Federal Reserve.

As annual inflation hit a four-decade high last month, the central bank began raising interest rates in a bid to calm demand. The Fed is trying to control prices without tipping the economy into recession.

“That’s our goal,” Fed Chairman Jerome Powell said during a roundtable discussion last week. “I don’t think you’ll hear anyone at the Fed say it’s going to be straightforward or easy.”

The Fed raised interest rates by a quarter of a percentage point in March, and it is expected to follow that with a half-point hike next week. Rising borrowing costs are already weighing on the housing market, where mortgage rates are now above 5%.

Pandemic shutdowns in China could also slow economic growth, potentially leading to lingering supply chain challenges and putting upward pressure on inflation.

Economist Mark Zandi of Moody’s Analytics lowered his forecast for GDP growth this year to around 3% from the 4% he forecast in January.

Still, he says the US economy has proven remarkably resilient to one challenge after another.

“There’s a lot of money in people’s bank accounts, and that should help them keep spending and weather any kind of storm that blows,” Zandi said. “And clearly the Russian invasion, rising gas and food prices and inflation are a storm.”

Copyright 2022 NPR. To learn more, visit https://www.npr.org.

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