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US economic growth in the last quarter was revised down from 1.6% to 1.3%, but consumers continued to spend
WASHINGTON (AP) — The U.S. economy grew at a slow annual pace of 1.3% from January to March, the weakest quarterly rate since the spring of 2022, the government said Thursday, in a downgrade of its estimate previous. Consumer spending rose, but at a slower pace than previously thought, a sign that high interest rates and persistent inflation are putting pressure on household budgets.
The Commerce Department had previously estimated that the country’s gross domestic product — the total production of goods and services — grew at a rate of 1.6% last quarter.
GDP growth in the first quarter marked a sharp slowdown compared to the vigorous rate of 3.4% in the last three months of 2023.
But last quarter’s downturn was mainly due to two factors – an increase in imports and a reduction in business inventories – which tend to fluctuate from quarter to quarter. Thursday’s report showed that imports subtracted more than 1 percentage point from last quarter’s growth. The drawdown in business inventories increased by almost half a percentage point.
In contrast, consumer spending, which fuels about 70% of economic growth, increased at an annual rate of 2%, down from 2.5% in the first estimate and rates above 3% in the previous two quarters. Spending on goods such as appliances and furniture fell at an annual rate of 1.9%, the biggest quarterly drop since 2021.
Still, spending on services rose at a healthy 3.9% pace, the highest since mid-2021. And a rise in business investment, led by housing, software and research and development, added more than 1 percentage point to growth annual report for the first quarter.
A measure of inflation in the January-March GDP report was revised slightly lower than the government’s original estimate. But price pressures still increased in the first quarter. Consumer prices rose at an annual rate of 3.3%, up from 1.8% in the fourth quarter of 2023 and the highest in a year. Excluding volatile food and energy costs, so-called underlying inflation rose at a pace of 3.6%, above the 2% recorded in each of the previous two quarters.
The US economy – the world’s largest – has shown surprising durability since the Federal Reserve began raising interest rates more than two years ago in its effort to control the worst bout of inflation in four decades. The resulting much higher financing costs were expected to trigger a recession. But the economy continued to grow and employers continued to hire.
Still, higher rates appear to be weighing on the economy.
“The impact of the Fed’s restrictive interest rate policy is clearly visible in the first quarter GDP report,” said Bill Adams, chief economist at Comerica, pointing in particular to a sharp drop in purchases of long-lasting manufactured goods.
The story continues
Several signs suggest the economy may be weakening. More Americans, for example, are falling behind on your credit card statements. Hiring is slowing, with companies posting fewer open jobs. More companies, including target, McDonalds and Burger King highlight price cuts or cheaper deals to try to attract consumers in financial difficulties.
AND with research showing While higher rents, groceries and gasoline are angering voters as the presidential campaign intensifies, Donald Trump has gone out of his way to pin the blame on President Joe Biden in a threat to the president’s re-election bid.
The economy’s growth was expected to be driven by lower interest rates this year. After raising its benchmark rate to a two-decade high last year, the Fed signaled it planned to cut rates three times in 2024. But 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 rate cuts were delayed as inflation, after falling steadily in late 2022 and most of 2023, remains stagnant above the Fed’s 2% target level.
“The future outlook is uncertain,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “A delay in the Fed’s rate cuts to combat persistent inflation could be a drag on consumption and the growth trajectory in the coming quarters.”
Thursday’s report was the second of three government estimates of first-quarter GDP growth. The Commerce Department will publish its first estimate of economic performance for the current quarter on July 25. A forecast tool issued by the Federal Reserve Bank of Atlanta suggests that economic growth is on track to accelerate to an annual rate of 3.5% from April to June.