WASHINGTON (AP) — The U.S. economy expanded at a 1.4% annual rate in January-March, the slowest quarterly growth rate since spring 2022, the government said Thursday, revising it slightly upward from its previous forecast. Consumer spending slowed to 1.5% from an earlier 2%, suggesting high interest rates may be hurting the economy.
The Commerce Department had previously estimated that gross domestic product – the total production of goods and services – grew 1.3% last quarter.
First-quarter GDP growth was a sharp retreat from a robust 3.4% pace in the final three months of 2023. Still, Thursday’s report showed the slowdown in January-March was driven primarily by two factors – a surge in imports and a decline in business inventories – which can fluctuate from quarter to quarter and don’t necessarily reflect the underlying health of the economy.
Imports dragged down growth by 0.82 percentage points in the first quarter, while a decline in inventories contributed 0.42 percentage points to the decline.
Making up the shortfall was business investment, which the government said rose 4.4% in the last quarter from a year earlier, up from 3.2% in the previous quarter. Increased investment in factories and other nonresidential buildings, and in software and other intellectual property drove the increase.
Consumer spending slowed sharply last quarter after growing at a robust 3%-plus annual rate in the second half of 2023. Spending on appliances, furniture and other goods fell 2.3% annually, while spending on travel, restaurant meals and other services rose 3.3%.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, called the decline in consumer spending “a concern,” as consumers account for about 70% of U.S. economic activity.
“The economy remained strong in the first quarter,” said Gregory Daco, chief economist at tax and consulting firm EY, “but private sector demand growth slowed as consumers became more cautious. Importantly, though, the economy is not contracting and business investment is maintaining its modest momentum.”
Many economists expect growth to strengthen in the current April-June quarter, but a forecasting model from Oxford Economics based on economic data released so far suggests growth will be weak at 1.3% this quarter.
The world’s largest economy has proven surprisingly resilient to rising interest rates. The base interest rate has been raised 11 times The Federal Reserve plans to raise interest rates to their highest in 23 years in 2022 and 2023 in an effort to tame the worst inflation in four decades. Most economists have predicted that the Fed’s rate hikes would send consumer borrowing rates soaring that they would tip the economy into recession.
But that didn’t happen. The economy continued to grow, but at a slower rate, and employers continued to hire. In May, the country 272,000 jobs addedThe unemployment rate rose for a second straight month but remained low at 4%. At the same time, overall inflation, as measured by the government’s main price index, fell sharply from a 2022 peak of 9.1%. Up to 3.3%It remains above the Fed’s target level of 2%.
The state of the economy is sure to be a central topic when President Joe Biden debates presumptive Republican presidential nominee Donald Trump on Thursday night. While the economy remains healthy by most measures and inflation has come down well from its peaks, many Americans say they are frustrated that overall prices are still well above pre-pandemic levels. Rising rent and grocery prices have been particular complaints, and Trump has sought to pin the blame on Biden as he threatens his reelection bid.
Inflation measures in the January-March GDP report showed price pressures accelerating in early 2024. Consumer prices rose at an annualized rate of 3.4%, up from 1.8% in the fourth quarter of 2023. So-called core inflation, which excludes volatile food and energy costs, rose at an annualized rate of 3.7%, up from 2% in the previous two quarters.
With inflationary pressures remaining elevated, Fed policymakers earlier this month agreed they would cut interest rates just once in 2024, down from their previous forecast of three cuts. Most economists expect the first cut to come in September and the second in December.
Thursday’s report marks the government’s third and final estimate of first-quarter GDP growth. The Commerce Department is scheduled to release its first estimate of the economy’s performance for the current quarter on July 25.