While the economy was not in recession last quarter, the outlook remains grim. file | Photo Credit: Reuters
US economic growth slowed more than expected in the first quarter as a pick-up in consumer spending was offset by businesses cutting inventory investments in anticipation of weaker demand amid higher borrowing costs this year.
Gross domestic product grew at a 1.1% annual rate last quarter, the government said in its advance estimate of first quarter GDP growth. The economy grew at a pace of 2.6% in the fourth quarter. Economists polled by Reuters had forecast GDP growth of 2.0%.
While the economy was not in recession last quarter, the outlook remains grim. Credit conditions have tightened following recent financial market turmoil, which combined with the Federal Reserve’s sharpest rate hike cycle since the 1980s, has raised recession risks through the second half of the year.
“The outlook is uncertain,” said Rubella Farooqui, chief US economist at High Frequency Economics. “Our base case is that the backward and cumulative effects of restrictive policy will propel the economy in the coming quarters at a lower pace than expected.”
Inventory investments declined at a $1.6 billion pace after rising at a rate of $136.5 billion in the fourth quarter. Inventories deducted 2.26 percentage points from GDP growth.
Excluding inventory, government and business, the economy grew at 2.9%. This measure of domestic demand was flat in the fourth quarter.
The Federal Reserve is on track to hike interest rates by another 25 basis points next week, in what is expected to be the last hike of the current cycle. The Fed has raised its policy rate by 475 basis points since March last year, from the near-zero level to the current 4.75%-5.00% range.
After January’s growth, which economists attributed to unseasonably mild weather and difficulties in adjusting the data for seasonal fluctuations, economic reports have taken a subdued tone, with retail sales falling in February and March.
Nevertheless, consumer spending grew faster in the fourth quarter at a pedestrian 1.0% pace in the January-March period. Consumer spending, which accounts for more than two-thirds of US economic activity, is being underpinned by a tight labor market, characterized by a 3.5% unemployment rate.
labor market remains tight
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits fell by 16,000 to a seasonally-adjusted 230,000 for the week ending April 22. Economists had expected 248,000 claims in the latest week. While claims, which have risen since March, are still well below levels that may warn about the labor market, reduced access to credit for businesses and households is hurting demand and ultimately employment. .
The claims report showed that after an initial week of aid the number of people receiving benefits fell by 3,000 to 1.858 million during the week ending April 15.
The so-called continuing claims data covers the period during which the government surveyed households for its April unemployment rate.
Continuing claims remain low by historical standards as some of the laid-off workers are quickly finding employment. There were 1.7 job openings for every unemployed person in February.
Despite the dark clouds over the economy, some economists were hopeful that a recession could be avoided. He noted that fears of a recession are pushing down the prices of commodities like oil, which could help ease cost pressures for businesses and benefit the overall economy.
Oil prices have erased all their gains since the Organization of the Petroleum Exporting Countries and producing allies such as Russia announced in early April to cut additional production until the end of the year.