US Growth Cools in First Quarter as Recession Fears Deepen

U.S. gross domestic product rose at an annual rate of 1.1% in the January to March period, markedly less than expected.

U.S. economic growth lost steam in the first quarter as gloomier business investment countered a rise in consumer spending, the Commerce Department said Thursday, while the possibility of a mild recession brews.

Consumption has provided a boost to the world's biggest economy, giving it a strong start to 2023, but recent banking sector turmoil and higher interest rates weigh on the outlook.

U.S. gross domestic product rose at an annual rate of 1.1% in the January to March period, markedly less than expected and down from 2.6% in the final three months last year.

"Compared to the fourth quarter, the deceleration in real GDP in the first quarter primarily reflected a downturn in private inventory investment and a slowdown in nonresidential fixed investment," the Commerce Department said.

It added that this was partly offset by an acceleration in consumer spending and an upturn in exports.

The GDP growth figure "reflected increases in consumer spending, exports, federal government spending," along with some forms of investment, said the department in a statement.

Economic activity has been easing as the U.S. central bank rapidly hiked its benchmark lending rate to tackle stubborn inflation, while the full fallout from recent financial sector unrest –- following the failures of three midsized lenders last month -– is yet to be seen.

Next month, Federal Reserve policymakers are expected to unveil another quarter-point rate increase in their quest to bring inflation back in line with a lower target.

"Looking ahead, the outlook is uncertain," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.

"Policymakers have taken aggressive action to slow down economic activity and lower inflation back towards target," she added.

'Dangerous' to extrapolate

Retail sales bounced in January, likely helped by mild weather, but Ian Shepherdson and Kieran Clancy of Pantheon Macroeconomics cautioned in a recent note that "it would be dangerous" to extrapolate from apparent strength in the first three months.

February and March figures "revealed a lack of momentum, which we expect to persist in the second quarter," they added.

In a separate report Thursday, Shepherdson said that consumption could "fall outright" should people respond to a worsening labor market by choosing to save more.

KPMG senior economist Kenneth Kim said in a note that "the strength in consumer spending for the quarter as a whole masks the sharp loss in spending power over the course of that time."

"With the exception of January, consumption has contracted in four out of the last five months. The Fed's rate hikes are starting to bite," he added.

Banking turmoil impact

Meanwhile, banking sector stress could bring tighter credit conditions, making it harder for households and businesses to get loans.

"The economy barely grew in the first quarter, but it is likely to shrink outright in Q2 and Q3. Welcome to the recession," Shepherdson said, referring to the second and third quarters.

Recent unrest in the banking system and tighter lending standards is expected to result in a more severe recession than anticipated later this year, though this will still be a mild downturn, Ryan Sweet of Oxford Economics told AFP.

"Our business cycle indicator shows the economy lost momentum in February and is close to turning negative," he said.

While large American banks have emerged relatively unscathed from recent pressures, "the turmoil may not yet be over," said Sweet.

"The economic costs have yet to be fully felt as banks are tightening lending standards and deposits at small banks have plunged," he said.

Written by:  Agence France-Presse, for Industry Week.