FILE – Articulated robots move inside the Hanwha Qcells Solar plant, Oct. 16, 2023, in Dalton, Ga. On Thursday, April 25, 2024, the U.S. government issues the first of three estimates of economic growth in the first quarter. (AP Photo/Mike Stewart, File)
WASHINGTON — The nation’s economy slowed sharply last quarter to a 1.6 percent annual pace in the face of high-interest rates, but consumers — the main driver of economic growth — kept spending at a solid pace.
Thursday’s report from the Commerce Department said the gross domestic product — the economy’s total output of goods and services — decelerated from its brisk 3.4 percent growth rate in the final three months of 2023.
A surge in imports, which were subtracted from GDP, reduced first-quarter growth by nearly 1 percentage point. Growth was also held back by businesses reducing their inventories. Both those categories tend to fluctuate sharply from quarter to quarter.
By contrast, the core components of the economy still appear sturdy. Along with households, businesses helped drive the economy last quarter with a strong pace of investment.
The import and inventory numbers can be volatile, so “there is still a lot of positive underlying momentum,” said Paul Ashworth, chief North America economist at Capital Economics.
The economy, though, is still creating price pressures, a continuing source of concern for the Federal Reserve.
A measure of inflation in Friday’s report accelerated to a 3.4 percent annual rate from January through March, up from 1.8 percent in the last three months of 2023 and the biggest increase in a year.
READ: US consumer inflation accelerated in March, dampening rate cut hopes
Excluding volatile food and energy prices, so-called core inflation rose at a 3.7 percent rate, up from 2 percent in the fourth quarter of 2023.
State of the economy and election season
The state of the U.S. economy has seized Americans’ attention as the election season has intensified. Although inflation has slowed sharply from a peak of 9.1 percent in 2022, prices remain well above their pre-pandemic levels.
Republican critics of President Joe Biden have sought to pin responsibility for high prices on Biden and use it as a cudgel to derail his re-election bid. Polls show that despite the healthy job market, a near-record-high stock market, and the sharp pullback in inflation, many Americans blame Biden for the high prices.
The economy’s gradual slowdown reflects, in large part, the much higher borrowing rates for home and auto loans, credit cards, and many business loans that have resulted from the 11 interest rate hikes the Fed imposed in its drive to tame inflation.
Even so, the United States has continued to outpace the rest of the world’s advanced economies.
READ: IMF: Outlook for world economy brighter, though still modest
The International Monetary Fund has projected that the world’s largest economy will grow 2.7 percent for all of 2024, up from 2.5 percent last year and more than double the growth the IMF expects this year for Germany, France, Italy, Japan, the United Kingdom and Canada.
Businesses have been pouring money into factories, warehouses, and other buildings, encouraged by federal incentives to manufacture computer chips and green technology in the United States. On the other hand, their spending on equipment has been weak. And as imports outpace exports, international trade is also thought to have been a drag on the economy’s first-quarter growth.
Inflation still above target
Kristalina Georgieva, the IMF’s managing director, cautioned last week that the “flipside″ of strong U.S. economic growth was that it was ”taking longer than expected” for inflation to reach the Fed’s 2 percent target, although price pressures have sharply slowed from their mid-2022 peak.
Inflation flared up in the spring of 2021 as the economy rebounded with unexpected speed from the COVID-19 recession, causing severe supply shortages. Russia’s invasion of Ukraine in February 2022 made things significantly worse by inflating prices for the energy and grains the world depends on.
The Fed responded by aggressively raising its benchmark rate between March 2022 and July 2023. Despite widespread predictions of a recession, the economy has proved unexpectedly durable. Hiring so far this year is even stronger than it was in 2023. Unemployment has remained below 4 percent for 26 straight months, the longest such streak since the 1960s.
Inflation, the main source of Americans’ discontent about the economy, has slowed from 9.1 percent in June 2022 to 3.5 percent. But progress has stalled lately.
Though the Fed’s policymakers signaled last month that they expect to cut rates three times this year, they have lately signaled that they’re in no hurry to reduce rates in the face of continued inflationary pressure. Now, a majority of Wall Street traders don’t expect them to start until the Fed’s September meeting, according to the CME FedWatch tool.