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WASHINGTON: US economic growth lost steam in the first quarter this year, said the Commerce Department on Thursday (Apr 27), as the possibility of a mild recession brews while consumer spending weakens.
Consumption has provided a boost to the world’s biggest economy, giving it a strong start to 2023, but recent banking sector turmoil and rising interest rates are likely to weigh on the outlook.
US gross domestic product rose at an annual rate of 1.1 per cent in the January to March period, down from 2.6 per cent in the fourth quarter last year.
“Compared to the fourth quarter, the deceleration in real GDP in the first quarter primarily reflected a downturn in private inventory investment and a slowdown in nonresidential fixed investment,” said the Commerce Department.
It added that this was partly offset by an acceleration in consumer spending and an upturn in exports.
The GDP growth figure “reflected increases in consumer spending, exports, federal government spending”, along with some forms of investment, said the department in a statement.
Economic activity has been easing as the US central bank rapidly hiked the benchmark lending rate to tackle stubborn inflation, while the full fallout from recent financial sector unrest – following the failures of three midsized lenders last month – is yet to be seen.
Next month, Federal Reserve policymakers are expected to unveil another quarter-point rate increase in their quest to bring inflation back in line with a lower target.
“Looking ahead, the outlook is uncertain,” said Rubeela Farooqi, chief US economist at High Frequency Economics.
“Policymakers have taken aggressive action to slow down economic activity and lower inflation back towards target,” she added.
“DANGEROUS” TO EXTRAPOLATE
Retail sales had bounced in January, likely helped by mild weather, but Ian Shepherdson and Kieran Clancy of Pantheon Macroeconomics cautioned that “it would be dangerous” to extrapolate from apparent strength in the first three months.
February and March figures “revealed a lack of momentum, which we expect to persist in the second quarter”, they added.
In a separate report Thursday, Shepherdson said that consumption could “fall outright” should people respond to a worsening labour market by choosing to save more.
Meanwhile, banking sector stress could bring tighter credit conditions, making it harder for households and businesses to get loans.
“The economy barely grew in the first quarter, but it is likely to shrink outright in Q2 and Q3. Welcome to the recession,” Shepherdson said, referring to the second and third quarters.
Recent unrest in the banking system and tighter lending standards are expected to result in a more severe recession than anticipated in the second quarter, though this will still be a mild downturn, Ryan Sweet of Oxford Economics told AFP ahead of the latest release.
“Our business cycle indicator shows the economy lost momentum in February and is close to turning negative,” he said.
While large American banks have emerged relatively unscathed from recent pressures, “the turmoil may not yet be over and uncertainty is high”, said Sweet.
“The economic costs have yet to be fully felt as banks are tightening lending standards and deposits at small banks have plunged,” he said.
