The country’s economy slowed sharply last quarter to an annual rate of 1.6% due to high interest rates, but consumers – the main driver of economic growth – continued to spend at a brisk pace.
According to Thursday’s Commerce Department report, gross domestic product – the economy’s total output of goods and services – slowed in the January-March quarter from the robust 3.4% growth rate in the last three months from 2023.
An increase in imports, which are subtracted from GDP, reduced growth in the first quarter by almost 1 percentage point. Growth was also slowed as companies reduced inventories. Both categories tend to fluctuate significantly from quarter to quarter.
In contrast, the core components of the economy still appear robust. Together with households, companies helped drive the economy with a high pace of investment last quarter.
Import and inventory figures can be volatile, so “there is still a lot of positive underlying momentum,” said Paul Ashworth, chief North America economist at Capital Economics.
However, the economy is still causing price pressure, an ongoing concern for the Federal Reserve. A measure of inflation in Friday’s report accelerated to an annual rate of 3.4% from January through March, up from 1.8% in the final three months of 2023 and the biggest increase in a year. Excluding volatile food and energy prices, so-called core inflation rose by 3.7%, up from 2% in the fourth quarter of 2023.
From January through March, consumer spending rose 2.5% annually, a solid pace, although it was still above 3% in each of the previous two quarters. U.S. spending on services — everything from movie tickets and restaurant meals to airline tickets and doctor visits — rose 4%, the fastest pace since mid-2021.
But they are cutting back on goods such as appliances and furniture. Spending on that category fell by 0.1%, the first decline since the summer of 2022.
Gregory Daco, chief economist at tax and advisory firm EY, noted that the underlying economy looks solid, although it is slowing from last year’s unexpectedly fast pace. He said the increase in imports, which accounted for much of the decline in growth in the first quarter, is “a sign of solid demand” from U.S. consumers for foreign goods.
Still, Daco said the economy’s “momentum is cooling.”
“This is unlikely to be a major cut,” he said, “but we will likely see cooler economic momentum as consumers take a more critical look at their spending.”
The state of the U.S. economy has captured Americans’ attention as the election season has intensified. While inflation has declined sharply after peaking at 9.1% in 2022, prices remain well above pre-pandemic levels.
Republican critics of President Joe Biden have tried to shift responsibility for the high prices to Biden and use them as a cudgel to derail his re-election bid. And polls show that despite a healthy labor market, a near-record high stock market and a sharp drop in inflation, many Americans are blaming Biden for high prices.
Last quarter’s GDP marked a streak of six consecutive quarters of annual growth of at least 2%. The 1.6% growth rate was also the slowest since the economy actually shrank in the first and second quarters of 2022.
The gradual slowdown in the economy reflects in large part the much higher interest rates on home and auto loans, credit cards and many business loans that have resulted from the 11 rate hikes imposed by the Fed in its effort to curb inflation.
Yet the United States continues to outpace the rest of the world’s advanced economies. The International Monetary Fund has forecast that the world’s largest economy will grow 2.7% for all of 2024, up from 2.5% last year and more than double the growth the IMF expects this year for Germany, France, Italy, Japan, the United Kingdom and Canada.
Companies have poured money into factories, warehouses and other buildings, encouraged by federal incentives to produce computer chips and green technology in the United States. On the other hand, their equipment spending was weak. And with imports exceeding exports, international trade is also believed to have put a damper on the economy’s growth in the first quarter.
Kristalina Georgieva, managing director of the IMF, warned last week that the “downside” of strong US economic growth was that it took “longer than expected” for inflation to reach the Fed’s 2% target, although price pressures from the midpoint of the month has decreased sharply. -2022 peak.
Inflation flared in the spring of 2021 as the economy recovered from the COVID-19 recession with unexpected speed, creating severe supply shortages. Russia’s invasion of Ukraine in February 2022 made matters significantly worse by driving up prices for the energy and grains the world depends on.
The Fed responded by aggressively raising rates between March 2022 and July 2023. Despite widespread predictions of a recession, the economy has proven unexpectedly sustainable. Hiring is actually stronger so far this year than in 2023. And unemployment has remained below 4% for 26 months in a row, the longest streak since the 1960s.
Inflation, the main source of US dissatisfaction with the economy, has fallen to 3.5% from 9.1% in June 2022. But progress has stalled recently.
Although Fed policymakers last month signaled they expect to cut rates three times this year, they have lately signaled they are in no rush to cut rates given persistent inflation pressures. According to CME’s FedWatch tool, a majority of Wall Street traders now don’t expect to launch before the Fed’s September meeting.