The US economy slowed sharply from January through March, decelerating to just a 1.1 percent annual pace as higher interest rates hammered the housing market and businesses reduced their inventories.
Thursday’s estimate from the Commerce Department showed that the nation’s gross domestic product — the broadest gauge of economic output — weakened after growing 3.2 percent from July through September and 2.6 percent from October through December. But consumer spending, which accounts for about 70 percent of US economic activity, remained resilient, growing at a 3.7 percent annual pace, the fastest such rate in nearly two years. Spending on goods, in particular, was solid: It rose at its fastest pace since the second quarter of 2021.
Economists had been expecting overall GDP to grow at a 1.9 percent pace in the January-March quarter. Behind much of the quarter’s weakness was a sharp reduction in business inventories, which subtracted roughly 2.3 percentage points from overall growth. Companies typically slash their inventories when they anticipate a coming downturn.
The economy’s slowdown reflects the impact of the Federal Reserve’s aggressive drive to tame inflation. The surge in borrowing costs is expected to send the economy into a recession sometime this year. Though inflation has steadily eased from the four-decade high it reached last year, it remains far above the Fed’s 2 percent target.
“The economy had less forward momentum at the start of this year than previously thought,” Andrew Hunter of Capital Economics wrote in a research note. “We continue to expect the drag from higher interest rates and tightening credit conditions to push the economy into a mild recession soon.”
Many economists say the cumulative impact of the Fed’s rate hikes has yet to be fully felt.
Economists had been expecting overall GDP to grow at a 1.9 percent pace in the January-March quarter. Behind much of the quarter’s weakness was a sharp reduction in business inventories, which subtracted roughly 2.3 percentage points from overall growth. Companies typically slash their inventories when they anticipate a coming downturn.
The economy’s slowdown reflects the impact of the Federal Reserve’s aggressive drive to tame inflation. The surge in borrowing costs is expected to send the economy into a recession sometime this year. Though inflation has steadily eased from the four-decade high it reached last year, it remains far above the Fed’s 2 percent target.
“The economy had less forward momentum at the start of this year than previously thought,” Andrew Hunter of Capital Economics wrote in a research note. “We continue to expect the drag from higher interest rates and tightening credit conditions to push the economy into a mild recession soon.”
Many economists say the cumulative impact of the Fed’s rate hikes has yet to be fully felt.