The slowdown in the US economy was confirmed in the first quarter, with gross domestic product (GDP) growth well below expectations, the first tangible sign of the effects of the Federal Reserve’s (Fed) rate hike since then. a year to fight inflation.
Over the first three months of the year, GDP growth stood at 1.1% at an annualized rate, according to an initial estimate published Thursday by the Commerce Department. This represents a strong slowdown compared to the 2.6% recorded in the previous quarter but also well below the expectations of analysts, who rather expected growth of 2% over the quarter, according to the consensus of Briefing.com.
Compared to the previous quarter, the growth of the American economy is 0.3%, half the pace observed in the last quarter of 2022 (+0.6%).
“GDP growth reflects an increase in consumer spending, public spending and exports which offset the decline in private and real estate investment”, detailed the ministry in its press release, which also underlines that growth is suffering the effect of an increase in imports.
The trade deficit widened in the first two months of the year due to an acceleration in imports, particularly of raw materials and pharmaceutical products.
Moreover, while household consumption held up from January to March, it slowed down over the months, even falling by 1% last month, while consumer confidence is also down.
Not without reason: even if inflation has slowed to the point of reaching 5% over one year in March, i.e. its lowest level for almost two years, according to the CPI index, it still remains too high and weighs on the household purchasing power.
However, real disposable income is accelerating compared to the previous quarter, up 8% over one year, compared to 5% in the last quarter of 2022, in particular under the effect of an increase in wages and social benefits.
Generalized inflation risk
US households are also having to deal with rising borrowing costs, which rose steadily during the year, keeping pace with the increase in the Fed’s key interest rate.
Overnight interest rates are now between 4.75% and 5%, the highest since 2007, and should continue to rise until inflation returns to 2%, the target set by the US central bank.
“Our data suggests that the monetary tightening and recent strains in the banking system will lead to a mild recession, although stronger than what we had anticipated so far”, underlined the chief economist of Oxford Economics, Ryan Sweet, interviewed by AFP.
Because most analysts expect a more difficult end of the year for the United States, with growth that should be weak, or even a recession, in the coming quarters, in particular due to the tightening of credit conditions.
“The boost to spending is fading, we expect much weaker consumption in the second quarter, particularly as the labor market deteriorates and slower hiring is creating jitters and inducing people to save,” said Ian Shepherdson, chief economist for Pantheon Economics, in a note.
The savings rate for the quarter did indeed increase by 0.8 percentage point compared to the previous quarter, with savings starting to rise again after several months of declines, according to data from the ministry.
The Fed is due to meet next week to decide whether or not to raise the rate again, while the market anticipates a moderate increase of around 0.25 percentage point.
Friday’s publication of the PCE inflation index, which is the one followed by the Fed, should give an indication of the decision that the central bank should take.
The fear for the Fed is to see the materialization of a risk of inflation “generalized in the economy”, alerted on April 21 one of its governors, Lisa Cook. She pointed out that while the various measures of inflation “had come back from their highs, they remained high, suggesting that inflation had become widespread in the economy.”
“The big question is whether, and how quickly, inflation will continue on its downward path towards our 2% target,” she added.