GDP growth slowed sharply in latest quarter amid Fed rate hikes

Business

From Associated Press

04/27/2023 | 9:14 a.m

The US economy slowed sharply from January to March, slowing to an annual pace of just 1.1% as higher interest rates hit the housing market and companies reduced inventories.

The Commerce Department’s estimate on Thursday showed the country’s gross domestic product — the broadest measure of economic output — weakened after growing 3.2% in July-September and 2.6% in October-November.

But consumer spending, which accounts for about 70% of US economic activity, remained resilient, growing 3.7% annually, the fastest quarterly pace in nearly two years.

The slowdown reflects the impact of the Federal Reserve’s aggressive bid to tame inflation, with nine rate hikes in the past year. Rising borrowing costs are expected to plunge the economy into recession sometime this year. Although inflation has steadily eased since the four-decade high it hit last year, it remains well above the Fed’s 2% target.

The housing market, which is particularly vulnerable to higher lending rates, has been hit. And many banks have tightened their lending standards since the collapse of two major US banks last month, making it even harder to borrow to buy a home, car or expand a business.

Many economists say the cumulative impact of Fed rate hikes is yet to be fully felt. Still, central bank policymakers are aiming for a so-called soft landing: slowing growth enough to curb inflation, but not so much that the world’s largest economy plunges into recession.

There is widespread skepticism that the Fed will be successful. An economic model used by the Conference Board, a corporate research group, puts the probability of a US recession next year at 99%.

The Conference Board’s recession probability gauge hovered around zero from September 2020, when the economy exploded from the COVID-19 recession, until March 2022, when the Fed began raising rates to fight inflation.

Consumers, whose spending accounts for around 70% of US economic output, seem to be starting to shiver. Retail sales got off to a strong start in January, helped by warmer-than-expected weather and larger Social Security checks. But in February and again in March, retail sales plummeted.

Worst fears of a 2008-style financial crisis have receded over the past month. But continued credit cuts, mentioned in this month’s Fed regional economy survey, are likely to hamper growth.

The political risks are also growing. Republicans in Congress are threatening to default the federal government on its debt by refusing to raise the legal borrowing limit unless Democrats and President Joe Biden agree to spending limits and cuts. A first-ever Bund default would rock the US Treasury market – the largest in the world – and potentially trigger a global financial crisis.

The global framework also looks bleaker. The International Monetary Fund this month downgraded its forecast for global economic growth, citing rising global interest rates, financial uncertainty and chronic inflation. American exporters could suffer.

Nevertheless, the US economy has surprised before. Recession fears rose early last year after GDP contracted for two straight quarters. But the economy boomed in the second half of 2022, fueled by surprisingly resilient consumer spending.

A strong job market has given Americans the confidence and financial means 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 slowing from January to February and then March.

The April jobs report, which the government is due to release on May 5, is expected to show that employers added a decent but still lower total of 185,000 jobs this month, according to a FactSet poll of forecasters.