Step.- The US economy faltered in the first few months of 2023, growing at an annual rate of 1.1 percent as higher interest rates and the banking crisis dragged down activity across all sectors.
The latest figures, released Thursday by the Bureau of Economic Analysis, mark a sharp slowdown at a time when Wall Street is already bracing for a recession, partly on fears that troubled banking sectors will cut lending. By comparison, the US economy grew at an annual rate of 2.6% in the last three months of 2022.
“The economy is in a very disturbing and risky situation,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “All forward-looking measures point to a significant slowdown.”
Three years after the 2020 coronavirus recession, the steepest and shortest on record, the US economy remains resilient but unstable. Businesses are hiring, people are getting raises, and families continue to spend.
But retail sales have fallen for two months in a row, manufacturing output is slumping and bank lending remains depressed. Meanwhile, major companies like 3M and Gap are laying off thousands, and concerns about a banking crisis have resurfaced this week, after First Republic Bank shares lost half their value in one day. And policymakers are still grappling with inflation, which has come down sharply from 40-year highs but is still above historical norms.
Tepid gross domestic product numbers released Thursday, which were significantly lower than the 1.9 percent annual growth analysts were expecting, have only added to the gloom. The data will inform policymakers as they consider the cumulative effect of a year of rapidly rising interest rates, as well as the debt ceiling battle rocking Washington. If President Biden and congressional Republicans fail to reach a deal in the coming months, global financial markets could plummet, putting more pressure on the economy.
Still, Biden applauded recent growth, saying his administration’s investments in manufacturing and supply chains helped create a record 12.5 million jobs in the past two years.
“Today we learned that the US economy remains strong as it transitions to steady and stable growth,” he said in a statement on Thursday. “US consumers continued to spend, even as the overall pace of growth moderated.”
But weaknesses continue to emerge. The Federal Reserve’s aggressive fight against inflation is hampering much of the economy, including housing and manufacturing. The labor market and consumer spending, while robust, are slowing. And there are growing fears that a setback in banks’ willingness to lend could freeze business investment and job creation. Many economists are predicting a recession later this year.
“We are seeing widening cracks in the economic base,” said Lydia Boussour, a senior economist at EY-Parthenon, who expects a mild recession in the coming months. “Consumer spending has been quite strong, but the report is hindsight and overstates some of the strength of consumers and the broader economy. We know the economy lost momentum as the quarter progressed, which sets the stage for weaker growth.
Consumer spending, which accounts for about 70 percent of the economy, helped lift the latest gross domestic product reading. Government spending at the local, state and federal levels, and exports also contributed to growth.
But there were also significant headwinds for the economy, as businesses reduced inventory as well as investments in machinery, equipment and supplies. A weak housing market and imports from other countries, particularly appliances and cars, also weighed on GDP, which measures goods and services produced in the United States.
Although consumers have been spending lavishly so far, particularly on dining out, travel and other services, there are signs that many could start to pull back. Credit card debt is starting to pile up, and many Americans have worked their way through pandemic-related stimulus funds and other savings. That, combined with a pinch of inflation, is likely to put a damper on spending plans later this year. Overall, prices are 4.9 percent higher than a year ago.
Amazon said Thursday that consumers are “focused on value” and are looking to stretch budgets further” and that there has been “a shift to lower-priced items.”
