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US economic growth slows sharply as interest rate hikes kick in
US economic growth slows sharply as interest rate hikes kick in
(about 3 hours later)
Annual pace decelerates to just 1.1% as fears of recession this year grow
Annual pace decelerates to just 1.1% as fears of recession this year grow despite strong consumer spending
The US economy slowed sharply from January through March, decelerating to just a 1.1% annual pace as higher interest rates hammered the housing market and businesses reduced inventories.
US economic growth slowed sharply in the first quarter of the year, despite strong consumer spending resilient to interest-rate rises designed to tame historic inflation.
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% from July through September and 2.6% from October through November.
The latest GDP figures released by the US commerce department show that the world’s largest economy slowed sharply from January through March, to just a 1.1% annual pace as businesses reduced inventories amid a decline in housing investment.
The slowdown reflects the impact of the Federal Reserve’s aggressive drive to tame inflation, with nine interest rate hikes over the past year. 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% target.
The abrupt deceleration from 2.6% growth in the final three months of 2022 and 3.2% from July to September came in significantly under economists’ expectations of a 2% increase.
The housing market, which is especially vulnerable to higher loan rates, has been battered. Consumer spending, which fuels roughly 70% of the entire economy, has softened. And many banks have tightened their lending standards since the failure last month of two major US banks, making it even harder to borrow to buy a house or a car or to expand a business.
The figures indicate that aggressive interest rises designed to tame inflation are beginning to produce what US central bankers desired – a slowing economy coupled with reduced wage increases and a tighter job market without tipping it into outright recession.
Many economists say the cumulative impact of the Fed’s rate hikes has yet to be fully felt. Yet the central bank’s policymakers are aiming for a so-called soft landing: cooling growth enough to curb inflation yet not so much as to send the world’s largest economy tumbling into a recession.
“The data confirm the message from other indicators that while economic growth is slowing, it isn’t yet collapsing,” said Andrew Hunter, chief US economist at Capital Economics. “Nevertheless, with most leading indicators of recession still flashing red and the drag from tighter credit conditions still to feed through, we expect a more marked weakening soon.”
There is widespread skepticism that the Fed will succeed. An economic model used by the Conference Board, a business research group, puts the probability of a US recession over the next year at 99%.
Resiliency in consumer spending, which rose 3.7%, reflected gains in goods and services and came as business investment in equipment recorded the biggest drop since the start of the pandemic in 2020 and inventories dropped the most in two years.
The Conference Board’s recession-probability gauge had hung around zero from September 2020, as the economy rebounded explosively from the Covid-19 recession, until March 2022, when the Fed started raising rates to fight inflation.
The Federal Reserve has indicated that while it has slowed the rate of interest rises, it expects commercial lenders, buffeted by the collapse of two regional banks this year, to tighten lending standards.
Consumers, whose spending accounts for roughly 70% of US economic output, seem to be starting to feel the chill. Retail sales had enjoyed a strong start in January, aided by warmer-than-expected weather and bigger social security checks. But in February and again in March, retail sales tumbled.
Many economists say the cumulative impact of Fed rate hikes and tighter lending requirements have yet to work their way through the system, presenting central bankers with a dilemma over whether to continue raising rates.
The worst fears of a 2008-style financial crisis have eased over the past month. But lingering credit cutbacks, which were mentioned in the Fed’s survey this month of regional economies, are likely to hobble growth.
“The last thing the Federal Reserve wants to be doing is raising rates as the economy begins to grind to a halt and potentially exacerbating the situation,” said Marcus Brookes, chief investment officer at Quilter Investors.
Political risks are growing, too. Congressional Republicans are threatening to let the federal government default on its debts, by refusing to raise the statutory limit on what it can borrow, if Democrats and President Joe Biden fail to agree to spending restrictions and cuts. A first-ever default on the federal debt would shatter the market for US Treasurys – the world’s biggest – and possibly cause a global financial crisis.
“The coveted soft landing is looking increasingly difficult to achieve and we are now getting towards a position where the market may become concerned that stagflation could be a likely possibility.”
The global backdrop is also looking bleaker. The International Monetary Fund this month downgraded its forecast for worldwide economic growth, citing rising interest rates around the world, financial uncertainty and chronic inflation. American exporters could suffer as a consequence.
There is widespread skepticism that the Fed will succeed in averting a recession. An economic model used by the Conference Board, a business research group, puts the probability of a US recession over the next year at 99%.
Still, the US economy has surprised before. Recession fears rose early last year after GDP had shrunk for two straight quarters. But the economy roared back in the second half of 2022, powered by surprisingly sturdy consumer spending.
That expectation is compounded by political risk, given congressional Republicans could let the US default on its debts by refusing to raise the statutory limit on what it can borrow. Wider global economic conditions are also in play.
A strong job market has given Americans the confidence and financial wherewithal to keep shopping: 2021 and 2022 were the two best years for job creation on record. And hiring has remained strong so far this year, though it has decelerated from January to February and then to March.
Earlier this month, the International Monetary Fund downgraded its forecast for worldwide economic growth, citing rising interest rates around the world, financial uncertainty and chronic inflation.
The jobs report for April, which the government will issue on 5 May, is expected to show that employers added a decent but still-lower total of 185,000 jobs this month, according to a survey of forecasters by FactSet.
The IMF chief, Kristalina Georgieva, said global growth would remain about 3% over the next five years: its lowest such forecast since 1990.
