GDP Decrease Is a Logical Result of Fighting Inflation
Updated: Aug 26, 2022
The job market is strong, with an unemployment rate of 3.6%.
The GDP decrease comes after the Fed’s decision to raise interest rates to combat inflation.
Low unemployment signals economic slowing is temporary after roaring back from Covid-19.
The United States’ Gross Domestic Product (GDP) decreased by 0.2% in the second quarter of 2022, a logical consequence of fighting inflation.
GDP measures the market value of all goods and services produced in the U.S. and is used as a measure of economic growth.
The 0.2% GDP decrease reported in late July comes after a 0.4% GDP decrease in the first quarter of 2022. While not ideal, this news is no cause for alarm.
Unlike previous times when the GDP has fallen, this GDP decrease is modest. What’s more, unemployment remains low. From April to June 2022, the economy created more than one million jobs.
The modest dip in GDP and low unemployment rate suggest this economic slowing is a temporary result of fighting inflation — not a sign of something worse.
How the Fed Helps
The Federal Reserve, known as the Fed, is the federal bank of the U.S. that controls interest rates. By setting interest rates for banks, the Fed plays an important role in stabilizing the economy in times of crisis.
When Covid-19 shut down the economy, the Fed lowered interest rates by about 2%. This made it cheaper for people to borrow money from banks, which helped the economy recover.
As the effects of Covid-19 on the economy became less, people had more money to spend and supplies of goods were relatively less. This is a recipe for inflation.
To fight inflation, the Fed raised interest rates by over 2% since the start of 2022.
Raising the interest rate makes it more expensive to borrow money, which has a cooling effect on inflation.
As markets adjust to the interest rate increases, inflation is likely to slow while not disrupting the strong job growth numbers.
Good News on Jobs
Right now, the unemployment rate is 3.6%. That is down quite a bit from the 14.8% unemployment rate in April 2020 at the height of the Covid-19 shutdowns.
In the second quarter of 2022, the economy created over one million jobs. This follows the U.S. creating more jobs in 2021 than any previous year in history.
As the country bounces back from the Covid-19 pandemic, it makes sense that the economy cannot keep growing as fast as it did to recover from Covid-19.
With the economy still creating jobs, the GDP decrease in the second quarter is not the alarm bell it’s been in the past.