As we enter the 3rd quarter of 2022, there are indications that the U.S. and global economies are slowing. U.S. GDP contracted by -1.6% in the 1st quarter. Official numbers for Q2 are not yet available, but estimates range from -1.2% to +0.8% on an annualized basis.1 There is significant uncertainty regarding what the second-half of the year will bring, but most estimates for the full year 2022 U.S. GDP growth remain positive, although they have been significantly downgraded in recent weeks. Current forecasts range from -0.3% to +2.4%. 2
Slowing economic growth is a worldwide phenomenon, with global growth expected to decline from 5.7% in 2021 to 2.9% in 2022, largely due to significant economic slowdowns in emerging economies.3 Most notable among these is China, which could see an almost unheard-of economic contraction, with a -1.5% GDP decline in Q2, compared to growth of +1.3% in Q1.4 This is largely due to the significant impacts of the ongoing COVID-19 pandemic, or more precisely, the Chinese government’s drastic policy response to it. COVID-19 lockdowns have hit factories and consumer spending hard, contributing to social unrest and an unusual economic slowdown in a country used to rapid economic growth. This is likely to affect China’s import purchases from abroad, particularly agricultural goods, much of which come from the United States.
The economic topic most top-of-mind at the moment is inflation. Beginning in March 2021, prices across the economy have been rising at an accelerated rate. In a very basic sense, rising prices are a result of demand for goods and services outpacing supply. Thus, there have been two primary drivers of U.S. inflation. The first is resurgent consumer spending following the COVID-19-driven economic contraction. The second major factor is the constrained supply of goods and services in the economy. Supply chain disruptions at home and abroad, as well as labor constraints have meant that retailers and service providers have struggled to keep shelves stocked and meet demand for services. Both of these factors combined have contributed to inflation of 9.1% in June, a pace not seen in more than 40 years.5
In response to rapidly rising prices, the Federal Reserve has moved aggressively to raise interest rates: 25 basis points in March, 50 basis points in May, and 75 basis points in June. In their upcoming July meeting, the Fed’s Open Market Committee is widely expected to bump rates by an additional 50,75 or even 100 basis points. Raising interest rates is the Fed’s main mechanism to fight inflation, which remains high. By making borrowing more expensive, the Fed hopes to cool consumer demand, and reduce pressure on prices in the economy. The good news – and the bad news (in a sense), is that it seems to be starting to work. Growth in consumer spending has slowed from +1.9% in January, to +0.2% in May, the last month with available data.6 This will likely have the desired effect of reducing consumer demand-driven inflation. It may be less effective in combating supply chain-driven inflation. The challenge in all of this, is for the Fed to act aggressively enough to bring inflation down without over-correcting and pushing the U.S. into a recession. For his part, Fed chair Jerome Powell has signaled that he plans to continue the Fed’s action even as economic indicators weaken, as long as the employment market remains tight.
Net Farm Income Projection
Source: USDA ERS & Farm Credit East Estimates. Does not include forest products or commercial fishing.
1 Goldman Sachs, The Conference Board, Federal Reserve Bank of Atlanta
2 Wells Fargo, Deloitte, The World Bank
3 The World Bank
5 US Bureau of Labor Statistics
6 US Bureau of Economic Analysis