US economic growth for last quarter is revised up slightly to a 1.4% annual rate
WASHINGTON — The US economy grew at an annual rate of 1.4% from January through March, the slowest quarterly growth since spring 2022, the government said on Thursday, in a slight upgrade from its previous estimate. Consumer spending grew just 1.5%, compared with an initial estimate of 2%, in a sign that high interest rates could take a toll on the economy.
The Commerce Department had previously estimated that gross domestic product (the economy’s total output of goods and services) rose 1.3% last quarter.
GDP growth in the first quarter marked a sharp pullback from the strong pace of 3.4% during the last three months of 2023. Still, Thursday’s report showed that the slowdown from January to March was mainly driven by two factors: a strong increase in imports and a decrease in turnover. inventories – which can fluctuate from quarter to quarter and do not necessarily reflect the underlying health of the economy.
Imports reduced growth in the first quarter by 0.82 percentage points. Lower inventories had a negative impact of 0.42 percentage points.
What added to the slack was business investment, which the government said rose 4.4% year-on-year last quarter, compared with the previous estimate of 3.2%. Higher investment in factories and other nonresidential buildings and in software and other forms of intellectual property contributed to the increase.
After solid annual growth of more than 3% in the second half of 2023, consumer spending slowed sharply last quarter. Spending on appliances, furniture and other goods fell at an annual rate of 2.3%, while spending on travel, restaurant meals and other services rose at a rate of 3.3%.
Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance, called the decline in consumer spending “a cause for concern.” Consumers account for about 70% of U.S. economic activity.
Most economists think growth has picked up in the current quarter. A forecasting tool from the Federal Reserve Bank of Atlanta predicts strong annual growth of 3%.
The US economy, the largest in the world, has proven surprisingly resilient in the face of higher interest rates. The Federal Reserve raised its benchmark rate eleven times in 2022 and 2023, to a 23-year high, to try to curb the worst inflation in four decades. Most economists predicted that the much higher consumer loan rates resulting from the Fed’s rate hikes would push the economy into a recession.
It didn’t happen. The economy has continued to grow, albeit at a slower pace, and employers have continued to hire. In May, the country added a whopping 272,000 jobs, although the unemployment rate rose to a still low 4% for the second month in a row. At the same time, headline inflation, as measured by the government’s main price gauge, has fallen from a peak of 9.1% in 2022 up to 3.3%still above the Fed’s 2% target level.
The state of the economy will undoubtedly be a central topic Thursday night when President Joe Biden debates Donald Trump, the presumptive Republican presidential nominee. While the economy remains healthy by most measures and inflation is well below its peak, many Americans say they are frustrated that overall prices are still well above pre-pandemic levels. Higher rent and grocery prices have been particular sources of discontent, and Trump has sought to blame Biden for the threat to the president’s re-election bid.
An inflation measure in the January-March GDP report showed that price pressures accelerated in early 2024. Consumer prices rose 3.4% on an annual basis, up from 1.8% in the fourth quarter of 2023. Excluding volatile food and energy costs, so-called core inflation rose 3.7% on an annual basis, compared with 2% in each of the previous two quarters.
With inflation pressures still high, Fed policymakers collectively forecast earlier this month that they would cut their benchmark interest rate just once in 2024, down from their previous forecast of three rate cuts. Most economists expect the first rate cut to come in September, with a second cut possible in December.
“A sustained slowdown in consumption will impact the (economic) growth trajectory in the coming quarters,” said Rubeela Farooqi, chief US economist at High Frequency Economics. “But a weaker growth path that leads to a Fed pivot to lower interest rates could support households and businesses over time.”
Thursday’s report was the third and final government estimate of GDP growth in the first quarter. The Commerce Department will release its first estimate of the current quarter’s economic performance on July 25.