GDP Report: US Economy Grew at 1.1% Rate in Q1

Despite higher interest rates, GDP increased 1.1 percent in the first quarter due to consumer spending.

GDP Report: US Economy Grew at 1.1% Rate in Q1

The housing market has slowed down. Businesses are cutting back on investment and hiring. The American consumer is keeping the economy from going into a recession, at least for the moment.

According to preliminary figures released on Thursday by the Commerce Department, the gross domestic product rose at an annual rate of 1.1 percent, after inflation. This was down from the 2.6 percent rate of the last three-months of 2022, but still a third consecutive quarter of growth following a decline in output in the first half last year.

Federal Reserve efforts to cool down the economy have an effect. For the eighth quarter in a line, the housing sector contracted and the business investment in equipment dropped for the second consecutive quarter. Interest rates are a major factor in both areas. Policymakers have increased interest rates repeatedly over the last year to combat inflation.

These declines, however, were more than offset due to robust consumer spending, which grew at a rate of 3.7 per cent annually, the fastest since mid-2021 when the Covid-19 vaccination rollout boosted the economy. The strong job market, rising wages and low borrowing costs have buoyed consumers.

Stephen Juneau is an economist with Bank of America. He said, "You learn to never bet against U.S. consumers."

Spending on travel, restaurant meals and other services continued to rise after four consecutive quarters of declines.

However, it's not clear how long this resilience will last. Forecasters say that spending could continue to decline amid news of layoffs, failures at banks, and possible recession. Savings rates are increasing, which may indicate that consumers are becoming more cautious. More Americans may also be falling behind in their debt payments as they struggle to keep up with the rising costs.

Ben Herzon is an economist with S&P Global Market Intelligence. He said: "Consumer expenditure continues to rise, but I'm not sure how long it will last." "Confidence has been eroding and is still eroding." You have to wonder if this will soon translate into spending cuts.

Many companies seem to believe so. The fact that companies didn't increase their inventories during the first quarter is an indication they are expecting sales to slow down in the months to come and they don't wish to be stuck with goods they can't sell.

Megan Greene is the chief economist at Kroll Institute. She said, "Consumption remains strong and yet, businesses appear to believe that they do not need to replenish inventories, because they think consumption may weaken." "So who's right?"

Ramsay Hawfield is a vice-president at Nexgrill. The company sells grills and outdoor cooking equipment in California. Sales of the lower-end models have been good so far this season. Sales of high-priced items have slowed in recent months. Mr. Hawfield believes that this is because consumers are more cautious with their budgets.

He said, "They don't feel as rich as they did a year ago and they are now feeling a bit pinched and nervous." "The person who was going to buy that $500 or $600-worth grill now says, 'Maybe i'll choose the $300 or $400-worth version.'

Nexgrill does not lay off workers, said Mr. Hawfield, and continues to invest in new products. It does so with caution, and avoids features that consumers may not find worth the additional cost. He said that retailers are pressuring Nexgrill to lower prices, something which was not true one year ago when consumers didn't pay attention to price tags.

He said, "They are pushing us to find a lower price."

Policymakers would welcome a gradual withdrawal by consumers, as they worry that free spending continues to fuel inflation. According to data released on Thursday, consumer prices increased at a rate of 4.2 percent annually in the first three months of the year, which is faster than the rate at the end last year, and significantly higher than the Fed's 2 percent target. Fed officials are expected to meet next week in Washington, where they will raise rates for a 10th time in a row.

The Commerce Department will provide data on income and expenditures for March, while the Labor Department will reveal whether wage growth slowed in the first three months, which is a major goal for the Fed.

The future of the economy may be determined by the state of labor. The savings stockpiles that many households had built up during the pandemic have been wiped out by two years of high inflation. As long as wages and hiring continue to rise, Americans can keep spending. The first-quarter after-tax income grew at an annual rate of 8 percent, adjusted for inflation. However, the large jump was partially due to the cost-of living adjustment, which led to an increase in Social Security benefits in January.

Dana Peterson is the chief economist of the Conference Board. This would almost certainly send the economy into recession.

She said, "If you are a consumer, and you fear losing your job, you will change your spending patterns, and this is what you'll find difficult."

In recent months, unemployment insurance applications have increased, but they dropped last week. Companies have also posted fewer job openings. As of yet, Ms. Peterson stated that "it is not a freefall". "It is a controlled fall, and this is what the Fed tries to achieve with higher rates."

The data released on Thursday predates the collapse of Silicon Valley Bank, and the subsequent financial turmoil. There are still more threats to come, such as a debt ceiling showdown which could destabilize the financial markets. Early estimates suggest that G.D.P. Growth is expected to slow down in the second quarter. Many analysts believe that a recession will occur later this year.

Jay Bryson is the chief economist at Wells Fargo.