GDP Report: US Economy Grew at 1.1% Rate in Q1

The housing market is slowing. Companies are pulling again on hiring and funding. However American customers are maintaining the economic system out of a recession — not less than for now.

Gross home product, adjusted for inflation, rose at a 1.1 p.c annual fee within the first quarter, in line with preliminary information launched by the Commerce Department on Thursday. That was down from a 2.6 p.c fee within the final three months of 2022 however nonetheless a 3rd straight quarter of development after output declined within the first half of final yr.

The Federal Reserve’s efforts to chill off the economic system are having an impact. The housing sector shrank for the eighth consecutive quarter, and enterprise funding in tools fell for the second quarter in a row. Each areas are closely influenced by rates of interest, which policymakers have raised repeatedly over the previous yr to tamp down inflation.

However these declines have been greater than offset by strong spending by customers, which rose at an annual fee of three.7 p.c, the quickest development since mid-2021, when the Covid-19 vaccine rollout lifted the economic system. Customers have been buoyed by a robust job market and rising wages, which have helped them climate the mixture of rising costs and better borrowing prices.

“You by no means wish to wager towards the U.S. shopper is what you study time and again,” mentioned Stephen Juneau, an economist at Financial institution of America.

Spending on companies akin to journey and restaurant meals continued to rebound from pandemic lows, and spending on items additionally rose after 4 straight quarters of declines.

It isn’t clear how lengthy that resilience can proceed, nonetheless. Spending slowed because the quarter progressed, and forecasters mentioned it may weaken additional amid headlines about layoffs, financial institution failures and warnings of a doable recession. Financial savings charges have been edging increased, an indication that buyers could also be rising extra cautious, and extra People are falling behind on debt funds, suggesting that they might be struggling to maintain up with rising costs.

“Shopper spending continues to be transferring up, however I don’t know the way lengthy that may final,” mentioned Ben Herzon, an economist at S&P World Market Intelligence. “Confidence is weak and has been weakening. You’ve received to surprise, will that quickly translate right into a pullback in spending?”

Many companies appear to suppose so. Corporations didn’t add to inventories within the first quarter, a sign that they anticipate gross sales to sluggish within the months forward and don’t wish to be caught with merchandise they’ll’t promote.

“Consumption continues to be sturdy, and but companies appear to suppose that they don’t have to restock inventories as a result of presumably they suppose consumption will weaken,” mentioned Megan Greene, chief economist for the Kroll Institute. “So who’s proper?”

At Nexgrill, a California-based vendor of grills and different outside cooking tools, gross sales of lower-end fashions, these below $500, have been sturdy thus far this yr, mentioned Ramsay Hawfield, a vice chairman on the firm. However gross sales of higher-priced merchandise have begun to sluggish in latest months, which Mr. Hawfield takes to imply that some customers are watching their budgets extra carefully.

“They’re not feeling as wealthy as they have been a yr or two in the past, and now they’re feeling a little bit pinched and a little bit nervous,” he mentioned. “The person who was shopping for that $500 or $600 grill is saying, ‘Possibly I’ll go together with that $300 or $400 model.’”

Nexgrill isn’t shedding any staff, Mr. Hawfield mentioned, and it’s nonetheless investing in new merchandise. However it’s doing so rigorously, avoiding options that buyers may not deem price the additional value. Retailers, he added, are pushing Nexgrill and different manufacturers to maintain costs down — one thing that was a lot much less true a yr in the past, when customers hardly appeared to have a look at worth tags.

“They’re pushing us on ‘Let’s discover a higher worth level,’” he mentioned.

A gradual pullback by customers could be welcomed by policymakers, who fear that continued free spending is fueling inflation. Shopper costs rose at a 4.2 p.c annual fee within the first quarter, in line with the information launched Thursday, quicker than on the finish of final yr and nicely above the Fed’s goal of two p.c. Fed officers will collect subsequent week in Washington and are anticipated to lift charges for the tenth assembly in a row.

Policymakers will get a extra up-to-date studying on the economic system on Friday, when the Commerce Division will launch revenue and spending information for March and the Labor Division will launch information displaying whether or not wage development continued to sluggish within the first quarter, a key purpose for the Fed.

What occurs subsequent could hinge on the labor market. Two years of excessive inflation and strong spending have eaten away on the stockpile of financial savings that many households constructed up early within the pandemic. However so long as firms maintain hiring and wages maintain rising, People will be capable to maintain spending. After-tax revenue rose at an 8 p.c annual fee within the first quarter, adjusted for inflation, although the massive soar was partly resulting from a cost-of-living adjustment that led to a rise in Social Safety funds in January.

But when firms begin shedding staff, customers’ willingness to maintain spending may evaporate in a rush, mentioned Dana Peterson, chief economist on the Convention Board, a enterprise group. That may nearly actually push the economic system right into a recession.

“In the event you’re a shopper and also you suppose you would possibly lose your job, then you definitely’re going to alter your spending habits, and that’s what’s going to be a drag,” she mentioned.

Filings for unemployment insurance coverage have edged up in latest months, although they fell final week, and firms have been posting fewer job openings. To date, nonetheless, “it’s not a free fall,” Ms. Peterson mentioned. “It’s a managed descent, and that’s what the Fed is attempting to realize with increased rates of interest.”

Nonetheless, the information launched Thursday principally predated the collapse of Silicon Valley Financial institution and the monetary turmoil that adopted. And there are extra threats on the horizon, together with a looming debt-ceiling showdown that might additional destabilize monetary markets. Early forecasts counsel that G.D.P. development is more likely to sluggish additional within the second quarter, and lots of analysts suppose a recession is probably going later this yr.

“If we do have a shock, if we do have a debt ceiling debacle or one thing like that, that raises the likelihood in my thoughts that we go right into a recession,” mentioned Jay Bryson, chief economist for Wells Fargo.