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From the inflation to the war in Ukraine, there seem to be plenty of reasons to worry about the economy these days, but things are looking good for the busy hotel Haya in Tampa, Florida.
Even with gasoline prices topping $ 4 a gallon, people are making the drive to the neighboring states and flocking to the hotel.
“They’ve been saving their money for the pandemic, and now they want to get away, wherever it takes them,” says the hotel’s general manager, Peter Wright.
That’s a new economic report card. The Commerce Department reported Thursday that the nation’s gross domestic product shrank at an annual rate of 1.4% in the first three months of this year – a marked contrast from the final months of 2021, which saw some of the fastest growth.
But economists say it’s not as worrisome as it might seem. Consumers continue to spend freely, and businesses are still investing, despite the sharp drop in headline GDP growth.
“We shouldn’t take that as a signal of the direction of the economy,” says Ben Herzon, senior US economist with S&P Global Market Intelligence. “If we peel back a couple of layers and just look at the underlying domestic demand, the economy looks like a little bit of steam.”
Take Tampa. More than three-quarters of the city’s hotel rooms were booked in mid-April, surpassing pre-pandemic levels, according to hospitality analysts at STR.
Strong demand has slashed the average nationwide price of a hotel room by more than 14% from 2019.
“We see a lot of staycations as well,” says Wright. “There was a lot of pent-up demand, so we were looking for a lot of local people coming and enjoying a few nights and a restaurant and pool. They’re looking for money to spend.”
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“Buy and buy and buy”
While the omicron wave of coronavirus infections discouraged some people from traveling and eating out in the first weeks of the year, that has given way to what Herzon calls a “COVID spring.”
“People are taking their masks off,” he says. “They’re getting back to consuming the services they were before they were consummated in the pandemic. That’s a pretty powerful push to help propel consumer spending – and GDP broadly – into the second half of the year.”
At the Tulip Festival in Wamego, Kan., Last weekend, Becky Rawls-Riley was showcasing a colorful collection of custom hats and scarves.
“Everybody’s back, which is great,” she says.
Craft festivals are a one- or two-year hiatus after returning to the COVID-19 pandemic, and that’s a relief for Rawls-Riley, who depends on both sales and customer feedback.
Sales were “gung-ho” in February, she says, but a little softer in March and April.
“There are some who will buy and buy,” she says, while others are “watching their pennies.”
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Not everything is rosy, of course
That’s not to say 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 display racks this year, as well as industrial sewing equipment, but both were delayed by supply chain bottlenecks.
“If you can make a product but you can’t display it, you have what you see, you’re in trouble,” she says. She also increased her prices to offset the rising costs of cotton, polyester and spandex, as well as her employees for higher wages.
“You can’t hold your price forever,” she says. “It’s just not possible.”
A survey of small-business owners by SCORE, a nonprofit business-mentoring service, found that two-thirds were facing rising costs from vendors and suppliers who raised more than half their own prices, averaging about 11%.
At Hotel Haya, Wright has also wrestled with rising costs and the challenge of recruiting workers. Pandemic has hit more than 1.5 million fewer people than the industry still employs in recent months.
“A lot of people left our business for a lot of reasons,” says Wright. “We are more creative than we have ever been in the past. There is such a shortage in the hospitality industry.”
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Inflation is still a headache
With strong demand and a tight labor market, the US economy is significantly hotter than Thursday’s GDP figure – too hot, in fact, for the Federal Reserve.
With annual inflation hitting a four-decade high last month, the central bank has seen an uptick in rising interest rates and cool demand. The Fed is trying to reinvest into the economy without tipping.
“That’s our goal,” Fed Chair Jerome Powell said during a panel discussion last week. “I don’t think anybody who’s Fed says that’s going to be straightforward or easy.”
The Fed raised interest rates by a quarter percentage point in March, and it’s expected to follow with a half-point increase next week. Higher borrowing costs are already weighing on the housing market, where mortgage rates now exceed 5%.
Pandemic lockdowns in China could also result in slower economic growth, greater dragging out of stubborn supply chain challenges and inflation on more upward pressure.
Economist Mark Zandi of Moody’s Analytics has lowered his forecast for GDP growth this year by about 3% to 4%.
Still, he says the US economy has been remarkably resilient to another.
“There’s a lot of cash sitting in people’s bank accounts, and that should help them continue to spend and navigate any kind of storm that’s blowing through,” Zandi says. “And the Russian invasion and the high gasoline and food prices and inflation are a storm.”