US growth likely slowed last quarter, but still points to a solid economy

WASHINGTON (AP) — After a robust end to 2023, the U.S. economy is believed to have continued its surprisingly healthy run early this year, with consumers still spending freely despite the pressure of high interest rates.

The Commerce Department is expected to report Thursday that gross domestic product — the economy’s total output of goods and services — grew at a slow but still decent pace of 2.2% annually from January through March, according to a survey of data company forecasters. Fact set.

Some economists foresee a stronger expansion than that. A forecast model from the Federal Reserve Bank of Atlanta points to an annual pace of 2.7% in the first quarter, driven by a 3.3% increase in consumer spending, the main driver of economic growth.

Be that as it may, economic growth is widely expected to have slowed from the strong annual growth rate of 3.4% from October to December. The slowdown reflects in large part the much higher interest rates on home and auto loans, credit cards and many business loans that have resulted from the 11 rate hikes imposed by the Federal Reserve as it strives to curb inflation.

Yet the United States continues to outpace the rest of the world’s advanced economies. The International Monetary Fund has forecast that the world’s largest economy will grow 2.7% for all of 2024, up from 2.5% last year and more than double the growth the IMF expects this year for Germany, France, Italy, Japan, the United Kingdom and Canada.

Americans, who emerged from the pandemic recession with plenty of money in reserve, have been spending energetically, an important trend because consumers account for about 70% of the country’s GDP. From February to March, retail sales rose 0.7% – almost double what economists expected.

Companies have poured money into factories, warehouses and other buildings, encouraged by federal incentives to produce computer chips and green technology in the United States. On the other hand, their equipment spending was weak. And with imports exceeding exports, international trade is also believed to have put a damper on the economy’s growth in the first quarter.

Kristalina Georgieva, managing director of the IMF, warned last week that the “downside” of strong US economic growth was that it took “longer than expected” for inflation to reach the Fed’s 2% target, although price pressures remained sharp has declined from the Fed’s 2% target. peak mid-2022.

Inflation flared in the spring of 2021 as the economy recovered from the COVID-19 recession with unexpected speed, creating severe supply shortages. Russia’s invasion of Ukraine in February 2022 made matters significantly worse by driving up prices for the energy and grains the world depends on.

The Fed responded by aggressively raising rates between March 2022 and July 2023. Despite widespread predictions of a recession, the economy has proven unexpectedly resilient. Economic growth has been at 2% annualized for six straight quarters – seven if the forecasters are right about GDP growth from January through March.

Hiring is actually stronger so far this year than in 2023. And unemployment has remained below 4% for 26 months in a row, the longest streak since the 1960s.

“Overall, U.S. economic activity remains resilient, driven by consumers’ continued ability and willingness to spend,” said Gregory Daco, chief economist at tax and advisory firm EY. ‘A robust labor market, together with positive real wage growth, continues to provide a solid foundation.’

Inflation, the main source of US dissatisfaction with the economy, has fallen to 3.5% from 9.1% in June 2022. But progress has stalled recently. Republican critics of President Joe Biden have tried to shift the blame for the high prices onto the president and use it as a cudgel to derail his re-election bid. Polls show that despite a healthy labor market, a near-record high in the stock market and the sharp slowdown in inflation, many Americans are blaming Biden for high prices.

Although Fed policymakers last month signaled they expect to cut rates three times this year, they have lately signaled they are in no rush to cut rates given persistent inflation pressures. According to CME’s FedWatch tool, a majority of Wall Street traders now don’t expect to launch before the Fed’s September meeting.

AP Economics writer Christopher Rugaber contributed to this report.