The short-term outlook for the U.S. economy worsened on several fronts Tuesday.
The International Monetary Fund downgraded its forecast for growth, citing rising inflation, the failure of President Biden’s Build Back Better spending bill, higher energy prices and the spread of COVID-19’s omicron variant.
The IMF slashed its growth forecast for the U.S. to 4.4% in 2022, down from the 5.9% projected last year. As part of an expected worldwide slowdown, China’s growth also is forecast to dip to 4.8% this year, down from a projection of 8.1% last year.
“Rising energy prices and supply disruptions have resulted in higher and more broad-based inflation than anticipated, notably in the United States and many emerging market and developing economies,” the IMF said in its report.
High inflation, supply chain bottlenecks and shortages of crucial computer chips are expected to hamper the U.S. economy throughout most of the midterm election year.
Coinciding with those forecasts, U.S. consumer confidence fell for the first time in four months in a key report Tuesday, and a new poll showed that only one-fourth of Americans believe their family’s financial situation will improve in 2022.
“Expectations about short-term growth prospects weakened, pointing to a likely moderation in growth during the first quarter of 2022,” said Lynn Franco, senior director of economic indicators at the Conference Board. “Looking ahead, both confidence and consumer spending may continue to be challenged by rising prices and the ongoing pandemic.”
The crunch on computer chips has become so tight that manufacturers and other buyers had less than five days’ supply of some chips late last year, the Commerce Department reported. Chip inventories have fallen from a 40-day supply in 2019.
Industry executives said they expect the chip shortages to last into next year.
“We aren’t even close to being out of the woods,” said Commerce Secretary Gina Raimondo, who urged Congress to approve a bill, stalled in the House, that would spend $52 billion to encourage construction of chip factories in the U.S.
Mr. Biden, whose job-approval rating has nosedived, made an unscheduled shopping trip Tuesday to HoneyMade, a clothing and gift shop on Capitol Hill that opened in 2021. He told the business owner that global supply chain challenges actually have benefited U.S. suppliers.
“The reason so many small businesses are opening up is that they’re all domestically sourced, you don’t have to wait for products coming from overseas,” Mr. Biden said. “That’s made a big difference.”
The president’s job-approval rating fell to 41% in a Pew Research Center survey released Tuesday, down 3 percentage points since September. Support among Democrats and Democratic-leaning voters fell by 7 points during the same period, while only 29% of Democrats expressed satisfaction with the state of the nation, down 18 points since March.
Support for Mr. Biden among Black voters fell to 60%, down from 67% in September.
Many people cite frustration that inflation has more than wiped out gains in wages in the past year, leaving household budgets further behind. The IMF noted that broadening price and wage pressures in the U.S. have prompted the Federal Reserve “to accelerate its taper of asset purchases and signaled that it will raise rates further in 2022 than previously expected.”
The Fed opened a two-day policy meeting on Tuesday that could result in an announcement to raise the benchmark interest rate. Central bank officials have forecast at least three rate hikes this year as they try to curb inflation, which hit a 40-year high of 7% in December.
Stocks fluctuated wildly Tuesday for the second straight day, partly on concerns about Fed action. The Dow Jones Industrial Average fell more than 600 points at one point, then climbed more than 1,000 points, finishing the trading day down 66 points to close at 34,297.
The tech-heavy Nasdaq index lost 2.2%, while the benchmark S&P 500 fell 1.2%.
Inflation is expected to remain “elevated” in the short term, averaging 3.9% in advanced economies worldwide in 2022 — the highest since 1991 — before subsiding in 2023, the IMF said.
“The rapid increase in fuel prices is also expected to moderate during 2022-23, which will help contain headline inflation,” the report said. “Similarly, food prices are expected to increase at a more moderate pace of about 4.5% in 2022 and decline in 2023.”
The U.S., which provided larger-than-normal unemployment benefits during the worst of the pandemic, is having more problems than other countries in getting workers to return from the sidelines.
“In many countries, nominal wage growth remains contained despite employment and participation returning almost to pre-pandemic levels,” the IMF said. “But in the United States the story is different: a sharp decline in unemployment has been accompanied by buoyant nominal wage growth. This suggests a degree of tightening in US labor markets not evident elsewhere.”
If U.S. labor force participation “remains below pre-pandemic levels and discouraged workers remain on the sidelines, tighter labor markets may feed through to higher prices,” the report said. That has prompted the Fed to tighten monetary policy and plan to raise interest rates faster than expected, it said.
The IMF expects the 19 European countries that share the euro currency to collectively grow 3.9% this year, down from 5.2% in 2021. Japan is forecast to register 3.3% growth this year, up from 1.6% last year, as a result of continuing government support for the economy.
Higher interest rates in the U.S. will raise the cost of everything from auto loans to home mortgages.
A new poll by the Convention of States Action, working with The Trafalgar Group, found 41% likely voters expect their situation to get worse and 33% expect it to stay the same.
Republicans and independents are more likely to say their situations will worsen — 64% and 46%, respectively — than stay the same, at 25% and 36%.
Six in 10 Democrats believe they will maintain the status quo at best, with 21% saying their financial situation will get worse and 38% betting on it staying the same.
The gloomy outlook reflects similar polling that found many Americans believe their incomes are not rising as fast as prices. Republicans have seized on the topic as they try to retake control of Congress in the November contests.
• Tom Howell Jr. and Jeff Mordock contributed to this article, which is based in part on wire service reports.