The American economy’s latest report card indicates growth slowed during the first quarter of the year as the Federal Reserve continued interest rate hikes to try and tamp down inflation.
The Commerce Department’s Bureau of Economic Analysis on Thursday released a new report on the growth of the country’s gross domestic product (GDP) — the measure of all goods and services produced — for the first quarter of the year, January through March.
Amid concerns about inflation and recession, the report is the first estimate of the country’s economic growth for 2023.
Here’s what you need to know about the new report:
Growing slower than expected
The economy grew slowly in the first quarter at an annualized rate of 1.1 percent. That’s a slower climb than the 2 percent increase forecast by Wall Street analysts after GDP grew 2.6 percent in the fourth quarter last year.
The slowdown in the first few months of 2023 reflects a dip in private inventory investment and nonresidential fixed investment, according to the new report, two key measures of business spending and expansion.
The new report comes after the unexpected collapse of Silicon Valley Bank and Signature Bank last month shook consumer confidence and raised concerns about the banking system. Ongoing congressional debate also continues to swirl about how to address the debt ceiling and concerns over the possibility that the country could default later this year.
Household spending is keeping the US out of recession
The Bureau of Economic Analysis report said the noted growth in GDP reflected increased spending in a number of areas — chiefly, consumer spending.
Retail sales fell between February and March, according to Census Bureau data, a signal that the economy was slowing more quickly than had been expected, but household spending still rose 3.7 percent during the first quarter.
The leading contributor to the growth in consumer spending on goods was motor vehicles and parts, while the leading contributor in the growth of consumer spending on services was health care and food services and accommodations, according to the report.
Recession remains a threat
The Federal Reserve has been raising interest rates in an effort to control inflation, moving last month to push its ninth rate hike since last March. The central bank’s efforts have raised concerns about the risk of a recession, as the higher rates tend to impact consumer and business spending.
“The disappointing 1.1% annualised rise in first-quarter GDP indicates that the economy had less forward momentum at the start of this year than previously thought,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics, as reported in Barron’s. “We continue to expect the drag from higher interest rates and tightening credit conditions to push the economy into a mild recession soon.”
But eToro’s Callie Cox said the report “is good news for people worried about recession risks,” noting a “decent” quarter of growth. “However, strong spending does give the Fed some leeway to keep hiking rates, and we could see inflation worries creep back into bond yields,” Cox said.
Government spending didn’t provide a boost
The economy slowed despite the increase in consumer and government spending on the federal, state and local levels. The Fed’s monetary policy committee is set to meet in May to decide on whether to up interest rates yet again.
The increase in federal government spending during the first quarter was led by nondefense spending, according to the GDP report, while the uptick in state and local government spending was led by “an increase in compensation of state and local government employees.”
The market was digesting the news
Wall Street was rising on Thursday after some companies, including Facebook parent company Meta, exceeded profit expectations. Meta shares jumped 15.1 percent.
The S&P 500 was 1.1 percent higher shortly before noon Thursday, and the Dow Jones Industrial Average was up 270 points, or 0.8 percent, and the Nasdaq composite was up 1.6 percent.
The new GDP release is also the first major economic report to come out after President Biden announced he’s running for another four years in the White House. Economic woes after the pandemic, from high inflation to recession fears, have plagued the Biden administration, even as the unemployment rate plunged to 3.5 percent earlier this year. His strength on the issue could be key to the success of his next campaign.
Notably, Thursday’s report is the Bureau of Economic Analysis’s first “estimate” report and could be subject to revision. A second updated estimate for the first quarter will be released toward the end of May.
Riley Gutiérrez McDermid contributed.