US economic growth slowed sharply in the first quarter of 2023 despite strong consumer spending, as the Federal Reserve ploughed ahead with its historic monetary tightening campaign.
The world’s largest economy grew 1.1 per cent on an annualised basis between January and March, according to preliminary data released by the commerce department on Thursday.
The figures marked an abrupt deceleration from the 2.6 per cent pace registered in the final three months of 2022 and came in well below economists’ expectations of a 2 per cent increase.
Other countries have so far outperformed expectations in the first quarter, with China growing at an annual rate of 4.5 per cent, driven by a consumer spending rebound after Beijing ended the zero-Covid policy.
The eurozone figures for January to March will be published on Friday and are expected to show annual growth of 1.4 per cent. On Thursday, gross domestic product figures from Belgium and Sweden exceeded expectations.
The US slowdown suggests the Fed’s year-long battle against rampant inflation is beginning to take effect. Since March last year, the US central bank has lifted its benchmark policy rate from near zero to just under 5 per cent, the fastest increase in decades.
Officials are set to deliver another quarter-point rate rise next week, which would lift the federal funds rate to a new target range of 5 per cent to 5.25 per cent. They are then expected to consider a pause in their tightening campaign.
Other major western economies are still grappling with soaring prices. Earlier this month, official data in the UK showed inflation had fallen less than expected in March, remaining stubbornly in the double digits.
US government bonds sold off after the US GDP data was released, pushing the two-year Treasury yield — which closely tracks interest rate expectations — up 0.13 percentage points to 4 per cent. The benchmark 10-year yield rose 0.09 percentage points to 3.52 per cent.
Despite the US economy’s ebbing momentum, Thursday’s data showed it continued to exhibit pockets of strength. Strong growth in consumption offset a drag from falling inventories and a slowdown in housing and business investment.
“Really peeling back the layers, it is very positive in terms of consumer spending,” said Kristina Hooper, chief global markets strategist at Invesco. But she added: “Seeing a robust amount of consumer spending can raise concerns that that is going to fuel more Fed rate hikes.”
Inflation-adjusted consumer spending rose at a 3.7 per cent annual rate, up from 1 per cent in the last quarter of 2022.
“At first glance this looks like a fairly robust GDP report despite the weak headline number,” said Aditya Bhave, senior US economist at Bank of America. “The concern is that a lot of the strength was driven by what happened in January. The handoff to the second quarter doesn’t look particularly encouraging.”
Fed chair Jay Powell has said the credit crunch stemming from the collapse of Silicon Valley Bank earlier this year could have a similar effect to rate tightening on the economy.
Some officials argue that a pause in the US central bank’s inflation-fighting campaign in June would allow policymakers to assess this question, as well as gauging the effect of their actions over the past year. Others say they are not ruling out further rate rises if warranted by the data.
What has kept officials on edge is the surprising resilience of the US consumer, buoyed by a tight labour market. But early signs of cooling in monthly jobs gains and wage growth have provided some comfort that the worst of the inflation shock has passed.
Officials maintain that returning inflation to the Fed’s longstanding 2 per cent target will require a period of “below-trend growth and some softening in labour market conditions”, but they have stopped short of forecasting a recession.
As of March, most officials expect inflation-adjusted GDP growth to slow to 0.4 per cent in 2023, before rebounding to 1.2 per cent the following year. The unemployment rate, meanwhile, is projected to peak at 4.6 per cent in 2024, according to most officials, up from its current level of 3.5 per cent.
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