The U.S. economy grew at a modest 1.3% annual rate from January to March, marking the weakest quarterly growth since spring 2022, according to a revised report from the government on Thursday. Consumer spending increased, though at a slower pace than initially estimated.
Previously, the Commerce Department had reported a 1.6% growth rate for the nation’s gross domestic product (GDP) — the total output of goods and services — in the first quarter.
This period’s GDP growth represents a significant slowdown from the robust 3.4% rate recorded in the final quarter of 2023.
The reduced growth in the first quarter was primarily due to a surge in imports and a decrease in business inventories, both of which tend to vary significantly from quarter to quarter. The report indicated that imports reduced last quarter’s growth by more than 1 percentage point, while lower business inventories shaved off nearly half a percentage point.
Conversely, consumer spending, which accounts for about 70% of economic growth, increased at a 2% annual rate, down from the previously estimated 2.5% and from over 3% in the preceding two quarters. Spending on goods like appliances and furniture fell at a 1.9% annual pace, the largest drop since 2021. However, spending on services rose at a robust 3.9% rate, the highest since mid-2021.
Inflation measures in the January-March GDP report were slightly revised down from initial estimates. Nonetheless, price pressures increased in the first quarter. Consumer prices rose at a 3.3% annual rate, up from 1.8% in the fourth quarter of 2023 and the highest in a year. Excluding volatile food and energy costs, core inflation increased at a 3.6% rate, up from 2% in each of the previous two quarters.
The U.S. economy has shown resilience despite the Federal Reserve’s aggressive interest rate hikes over the past two years aimed at curbing the highest inflation in four decades. Higher borrowing costs were expected to lead to a recession, but the economy has continued to grow, and employment has remained strong.
Economists are not overly concerned about the first-quarter growth slowdown, although several indicators suggest potential economic weakening. More Americans are falling behind on credit card payments, hiring is slowing, and businesses are posting fewer job openings. Companies like Target, McDonald’s, and Burger King are offering price cuts or cheaper deals to attract budget-conscious consumers.
As the presidential campaign heats up, rising costs for rent, groceries, and gasoline are becoming a significant issue for voters. Former President Donald Trump has been trying to blame President Joe Biden for these economic challenges, posing a threat to Biden’s re-election bid.
Economic growth was expected to benefit from lower interest rates this year. The Federal Reserve had signaled plans to cut its benchmark rate three times in 2024 after raising it to a two-decade high last year. However, the start of rate cuts has been delayed.
Most Wall Street traders do not anticipate the first rate cut until November, according to the CME FedWatch tool. This delay is due to inflation remaining above the Fed’s 2% target, despite falling steadily in late 2022 and most of 2023.
“The outlook going forward is uncertain,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “A delay in Fed rate cuts to counter sticky inflation could be headwinds for consumption and the growth trajectory over coming quarters.”
Thursday’s report was the second of three government estimates for first-quarter GDP growth. The Commerce Department will release its first estimate of the current quarter’s economic performance on July 25. A forecasting tool from the Federal Reserve Bank of Atlanta suggests that economic growth may accelerate to a 3.5% annual rate from April to June.
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