U.S. economic growth slowed dramatically in the first three months of 2023, according to data released Thursday by the Bureau of Economic Analysis (BEA).
Gross domestic product (GDP), the measure of all final goods and services produced, rose at an annualized rate of 1.1 percent in the first quarter, federal officials estimated. That’s down from 2.6 percent in the fourth quarter of 2022.
Economists forecasted the nation’s GDP to grow at an annualized rate of 2 percent in the first quarter. Analysts cautioned that much of the growth took place in January thanks in part to unusually warm weather, but economic activity began to fall off fast in March.
Although retail sales fell in March as inflation and higher borrowing costs hit consumers, household spending still rose 3.7 percent during the first quarter from the last three months of 2022.
“The U.S. economy eked out modest growth in the first quarter on the back of strong consumer spending. But the consumer ended the quarter on a sour note, calling into question the sustainability of economic growth moving forward,” said Morning Consult chief economist John Leer in a Friday analysis.
“Without a robust consumer, we’re likely to see more volatility and uncertainty in economic activity through the end of the year.”
The unexpectedly steep slowdown in economic growth is the latest sign of the U.S. economy feeling the brunt of stubborn inflation and steep Federal Reserve rate hikes intended to bring prices down. The aftermath of the March 2023 banking crisis and fears of another financial crunch are also slowing the economy through steeper borrowing costs and less consumer confidence.
Business investment plunged 12.5 percent between the end of last year and the beginning of 2023, sapping strength from the economy.
“We think the [first quarter] will be followed by a modest outright decline in the second quarter, marking the start of a recession, which we expect to last until the fall,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a research note ahead of the report.
“We’ll have a much better idea once the extent of the credit tightening, triggered by the
banking crisis, becomes clear.”
From here, economists largely expect economic growth to deteriorate rapidly. The Conference Board forecasts U.S. GDP to contract 1.8 percent in the second quarter amid fears of a looming recession.
Consumer demand is finally cooling after years of elevated inflation and a flurry of Fed interest rate hikes. Banks are pulling back on commercial lending following the failure of Silicon Valley Bank, slowing the growth of businesses that rely on financing.
“The job market and consumer spending have held up remarkably well despite the Fed raising interest rates as high and as fast as they have, and so far that doesn’t seem to be falling apart, but the economy is slowing and inflation is not anywhere near the Fed’s target of 2 percent,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance, in a Thursday statement.
Prices for consumer goods rose 4.2 percent during the first quarter, up from a 3.7 percent quarterly inflation rate during the fourth quarter of 2022. The Fed aims for annual inflation of 2 percent and may be compelled to keep raising rates if inflation remains high even as the economy slows.
The Fed’s rate-setting committee will meet May 1 and 2 to decide whether to issue another 0.25 percentage point rate hike or step back as the economy shows clear signs of slowing down.
Fed officials expect to raise rates at least one more time in 2023, according to projections from their March meeting, but they did not commit to a course of action for May.
The slowdown in economic growth also poses a serious political challenge for President Biden, whose recently launched reelection campaign may depend largely on the strength of the economy.
Under Biden, the U.S. regained millions of jobs lost to the COVID-19 recession and saw the unemployment rate drop back down to 3.5 percent — its level in February 2020, which was the lowest jobless rate in 50 years. The rapid rebound also helped millions of Americans find new jobs with better compensation or working conditions as employers battled to fill record numbers of open positions.
Even so, American households are still struggling amid high inflation, rising borrowing costs, and now a pullback in business investment that could leave the U.S. closer to recession.
Updated at 9:30 a.m.