The US economy has grown at 1.3% annual pace from January through March, the weakest quarterly rate since spring 2022, according to government figures released on Thursday.
While consumer spending did increase, it was at a slower pace than previously estimated. The Commerce Department had initially projected that the nation’s gross domestic product – the total output of goods and services – expanded at a 1.6% rate last quarter.
This GDP growth for the first quarter represents a significant slowdown from the robust 3.4% rate seen in the final three months of 2023. However, this deceleration in the last quarter is primarily attributed to two factors – a surge in imports and a reduction in business inventories – which tend to fluctuate from quarter to quarter.
Thursday’s report revealed that imports subtracted more than 1 percentage point from last quarter’s growth, while a decrease in business inventories removed nearly half a percentage point. In contrast, consumer spending, which drives about 70% of economic growth, increased at a 2% annual rate, down from the initial estimate of 2.5% and from rates exceeding 3% in the previous two quarters.
Spending on goods such as appliances and furniture fell at a 1.9% annual pace, representing the largest such quarterly drop since 2021. However, spending on services rose at a healthy 3.9% clip, the highest since mid-2021.
A measure of inflation in the GDP report for January-March was slightly revised down from the government’s initial estimate. However, price pressures still increased in the first quarter.
Consumer prices saw a 3.3% annual increase, up from 1.8% in the fourth quarter of 2023 and marking the highest rise in a year. Excluding fluctuating food and energy costs, core inflation rose at a rate of 3.6%, up from 2% in each of the previous two quarters.
The US economy, being the largest globally, has demonstrated unexpected resilience since the Federal Reserve began increasing interest rates over two years ago to control the worst inflation outbreak in four decades. The resulting higher borrowing costs were anticipated to cause a recession.
However, the economy has continued to grow, and employers have maintained hiring. Economists have expressed that they are not overly concerned about the decrease in first-quarter growth, despite several indicators suggesting potential economic weakening. For instance, more Americans are falling behind on their credit card payments.
Hiring is slowing down, with businesses advertising fewer job vacancies. More companies, including Target, McDonalds and Burger King, are emphasising price reductions or budget-friendly deals to attract consumers struggling with higher costs.
The economy was predicted to benefit from lower interest rates this year. After raising its benchmark rate to a 20-year high last year, the Fed indicated plans to cut rates three times in 2024. However, the central bank has consistently delayed the start of these cuts.
According to the CME FedWatch tool, most Wall Street traders don’t anticipate the first rate reduction until November. The delay is due to inflation remaining stubbornly above the Fed’s 2% target level, despite having fallen steadily throughout 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.″
The government’s second estimate of first-quarter GDP growth was released on Thursday. The Commerce Department will publish 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 is set to accelerate to a 3.5% annual rate from April through June.
