US economic output grew at a slower pace in the first quarter, adding to signs that higher interest rates are dragging the economy into recession.
- The economy grew at an annual rate of 1.1% in the first quarter, the slowest in three quarters and down from 2.6% growth in the fourth quarter of 2022.
- The slowdown in economic growth was mainly due to a contraction in business investment and highlighted the threat of a recession on the horizon.
- The GDP report showed how higher borrowing costs due to the Federal Reserve’s anti-inflation rate hikes are slowing the economy.
Gross domestic product (GDP) grew at an annual rate of 1.1 percent in the first quarter of 2023, the Bureau of Economic Analysis said Thursday. That was a sharp slowdown from the 2.6% level in the fourth quarter of 2022 and fell short of the average economists’ forecast of 2%.
The decline in GDP growth, a broad measure of the economy’s overall output, underscores the impact of the Federal Reserve’s campaign to raise interest rates. The increases appear to be having the intended effect of slowing the economy in an effort to curb still-high inflation.
Other recent indicators, including the Conference Board’s leading economic index, have signaled an impending recession. The downside risk has only increased as banks face pressure to be more cautious in lending amid ongoing turmoil in the financial system.
“We believe Q1 will turn out to be the best quarter for the economy this year,” Oren Klachkin, chief US economist at Oxford Economics, wrote in a commentary. “We expect modest GDP growth in the second quarter and a mild recession in the second half of the year as tighter credit conditions, higher interest rates and persistent price pressures cause consumers and businesses to hold back on spending.”
Higher borrowing costs, which made mortgages unaffordable for many potential homebuyers, hurt the housing industry in particular. Investment in residential property, as measured by GDP, fell 4.2 percent in the first quarter after double-digit declines in the previous three.
The biggest drag on GDP growth was the change in inventories – how much firms are hoarding unsold goods – which signals what demand they expect in the future. Stocks took 2.3% off the annual growth rate.
GDP growth remained in positive territory largely due to consumer spending, which added 2.5 percent to the total and grew at its fastest pace in a year and a half, though possibly only due to unusually good weather at the start of the year, they said economists.
While economists remain divided on whether the economy is headed for a full-blown recession or just a mild stretch of slower growth, the GDP report pointed to the serious risk of a downturn ahead.
“It would take little to push the economy into recession,” Scott Hoyt, an economist at Moody’s Analytics, wrote in a comment on the GDP data.