The U.S. economy grew at a sluggish 1.3% annualized rate in January-March, the slowest quarterly growth rate since spring 2022, the government said Thursday, revising down its previous forecast.
Consumer spending increased but at a slower pace than previously expected, suggesting that high interest rates and lingering inflation are putting pressure on household finances.
The Commerce Department had previously estimated that gross domestic product – the total production of goods and services – grew 1.6% last quarter.
First-quarter GDP growth slowed significantly from a robust 3.4% growth rate in the final three months of 2023.
But last quarter’s decline was mainly due to two factors that tend to fluctuate from quarter to quarter: a surge in imports and a decline in business inventories.
Imports dragged down growth by more than a percentage point last quarter, Thursday’s report showed.
It fell by nearly half a percentage point due to a decline in business inventories.
In contrast, consumer spending, which drives about 70% of economic growth, rose at an annualized rate of 2%, down from an initial estimate of 2.5% and growth of more than 3% in the past two quarters.
Spending on items such as appliances and furniture fell 1.9% from a year earlier, the biggest quarterly decline since 2021.
Still, spending on services grew a healthy 3.9%, the strongest increase since mid-2021.
And rising business investment, especially in housing, software and research and development, lifted annual growth by more than a percentage point in the first quarter.
The inflation indicator in the January-March GDP report was revised slightly downward from the government’s initial estimate.
However, pricing pressures remained elevated in the first quarter.
Consumer prices rose 3.3% from a year earlier, up from 1.8% in the fourth quarter of 2023, the biggest increase in a year.
So-called core inflation, which excludes volatile food and energy costs, rose to 3.6%, up from 2% in the previous two quarters.
The U.S. economy, the world’s largest, has shown remarkable resilience since the Federal Reserve began raising interest rates more than two years ago to tame the worst surge in inflation in four decades.
This would result in a significant increase in borrowing costs, which was expected to trigger an economic downturn.
But the economy continued to grow and employers continued to hire.
Still, rising interest rates appear to be weighing heavily on the economy.
“The impact of the Fed’s tightening interest rate policy was clearly visible in the first-quarter GDP report,” said Bill Adams, chief economist at Comerica, noting that purchases of durable industrial products in particular fell sharply.
There are many signs that the economy may be weakening. For example, Americans Falling behind It will be listed on your credit card statement.
Hiring is slowing as companies are posting fewer job openings.
More companies, including Target, McDonald’s and Burger King, are emphasizing price cuts and cheaper sales to attract financially struggling consumers.
and According to a poll As the presidential election heats up, President Donald Trump is trying to pin the blame on Biden, saying rising rent, grocery and gas prices are angering voters, threatening his own re-election.
Lower interest rates were expected to boost economic growth this year.
The Fed had signaled it planned to cut interest rates three times in 2024 after raising them to their highest level in 20 years last year.
However, the central bank has repeatedly delayed the start of rate cuts.
Most Wall Street traders don’t expect the first rate cut until November, according to the CME FedWatch tool.
The delay in the rate cut comes as inflation remains above the Fed’s 2% target level even after steadily declining through the second half of 2022 and most of 2023.
“The outlook is unclear,” said Rubeela Farooqui, chief U.S. economist at High Frequency Economics. “A delay in the Fed’s rate cuts to combat rising inflation could pose a headwind for consumption and the growth trajectory in coming quarters.”
Thursday’s report was the second of three government estimates of first-quarter GDP growth.
The Commerce Department is scheduled to release its first forecast of the economy’s performance this quarter on July 25.
Economic growth is expected to accelerate to a 3.5% annualized rate from April through June, according to a forecasting tool released by the Federal Reserve Bank of Atlanta.
