WASHINGTON — Growth in the nation's economy slowed last quarter to a 1.6% annual pace in the face of higher interest rates, but consumers — the economy's main driver — spent at a solid pace.
Gross domestic product — the economy's total output of goods and services — slowed in the January-March quarter from its brisk 3.4% growth rate in the final three months of 2023, the Commerce Department reported on Thursday.
A rise in imports, subtracted from GDP, slowed first-quarter growth by nearly 1 percent. Growth was also hampered as businesses reduced their inventories. Both of those categories fluctuate wildly from quarter to quarter.
In contrast, the core elements of the economy are seen as more stable. Along with households, businesses also helped drive the economy with strong investment last quarter.
Import and inventory numbers may be volatile, so „there's still a lot of positive underlying momentum,” said Paul Ashworth, chief North American economist at Capital Economics.
Measures of demand were significantly stronger, giving no hint of the slowdown that forecasters spent most of last year predicting.
„This would suggest some moderation in growth, but still a solid economy,” said Michael Capen, chief U.S. economist at Bank of America. He said there were „some signs of overall weakness” in the report.
However, the economy is still generating price pressures, a continuing source of concern for the Federal Reserve. Friday's report showed inflation rose to a 3.4% annual rate from January to March, up from 1.8% in the last three months of 2023 and the largest increase in a year. Excluding volatile food and energy prices, core inflation rose to 3.7%, up from 2% in the fourth quarter of 2023.
„The hot inflation print is the real story in this report,” Olu Sonola, head of U.S. economic research at Fitch Ratings, said in a note. “The expectation is that growth will continue to slow, but inflation will go strongly back into the wrong direction [Federal Reserve] A rate cut in 2024 looks increasingly out of reach.”
From January to March, consumer spending rose at a 2.5% annualized rate, a solid pace from a rate of more than 3% in each of the previous two quarters. Americans' spending on services — everything from movie tickets and restaurant meals to airfare and doctor's visits — rose 4%, the fastest pace since mid-2021.
But they reduce costs for things like appliances and furniture. Spending for that category fell 0.1%, the first such drop since the summer of 2022.
Gregory Daco, chief economist at tax and consulting firm EY, noted that the underlying economy looks solid, albeit slowing from last year's unexpectedly fast pace.
He noted that the surge in imports, which accounted for the drop in first-quarter growth, was a „sign of solid demand” by U.S. consumers for foreign goods.
However, Taco said the economy's „momentum is cooling.”
„It's unlikely to be a major layoff,” he said, „but we're likely to see cooling economic momentum as a result of consumers becoming more scrutinized with their spending.”
With election season in full swing, the state of the US economy has caught the attention of Americans. Although inflation has fallen sharply from a peak of 9.1% in 2022, prices remain well above their pre-pandemic levels.
Republican critics of President Joe Biden have sought to hold Biden accountable for the high cost and use it as a cudgel to derail his re-election bid.
Polls show many Americans blame Biden for high prices, despite a healthy job market, a record-high stock market and a sharp rebound in inflation.
Last quarter's GDP snapped a six-quarter streak of at least 2% annual growth. The 1.6% expansion rate slowed since the economy actually contracted in the first and second quarters of 2022.
The gradual slowdown in the economy reflects, in large part, higher lending rates for home and auto loans, credit cards, and many commercial loans resulting from the 11 percent interest rate.
Even so, the US continues to outpace the rest of the world's advanced economies. The International Monetary Fund predicts the world's largest economy will grow 2.7% in 2024, up from 2.5% last year and more than double the growth expected by Germany, France, Italy, Japan, the United Kingdom and the IMF this year. Canada.
Businesses are pouring 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 spending on equipment is weak. And international trade is also seen as a drag on the economy's first-quarter growth, as imports outpace exports.
Kristalina Georgieva, the IMF's managing director, warned last week that a slowdown in strong U.S. economic growth means inflation will „take longer than expected” to reach the central bank's 2% target, although price pressures have eased sharply from their mid-2022 peak.
Inflation picked up in spring 2021 as the economy recovered from the Covid-19 recession at an unexpected pace, causing severe supply shortages. Russia's invasion of Ukraine in February 2022 made matters significantly worse by raising prices for the energy and grains the world relies on.
The central bank responded by raising the benchmark rate aggressively between March 2022 and July 2023. Despite widespread predictions of a recession, the economy unexpectedly held up.
Hiring is even stronger so far this year than it was in 2023. And unemployment has been below 4% for 26 months, the longest streak since the 1960s.
Inflation, a key source of Americans' dissatisfaction with the economy, fell to 3.5% from 9.1% in June 2022. But progress has stalled recently.
Although central bank policymakers signaled last month that they expect to cut rates three times this year, they have signaled recently that they are in no rush to cut rates in the face of continued inflationary pressures. According to the CME FedWatch tool, most Wall Street traders don't expect the Fed to start until the September meeting.
At next week's Fed meeting, traders will look to Chairman Jerome Powell's comments for clues about the latest thinking on easing policy. He previously said that growth can run at a faster rate without fueling inflation, thanks to supply-side improvements such as immigration, which boosts the labor force.
At the very least, stubborn inflation means waiting at least until the fall before starting to cut interest rates. Some forecasters think policymakers won't keep rates „high for long,” as investors have been expecting for weeks now, but could actually raise them further.
„It's a big change because suddenly 'more time' means another hike,” said Diane Swank, chief economist at KPMG. For now, he said, the central bank is stuck in a „monetary policy purge”.
Paul Wiseman of the Associated Press, Molly Smith of Bloomberg News (DNS) and Ben Casselman of The New York Times provided information for this article.