By PAUL WISEMAN (AP Economics Writer)
WASHINGTON (AP) — The U.S. economic system slowed sharply from January by March, decelerating to only a 1.1% annual tempo as greater rates of interest hammered the housing market and companies diminished their inventories.
Thursday’s estimate from the Commerce Department confirmed that the nation’s gross home product — the broadest gauge of financial output — weakened after rising 3.2% from July by September and a pair of.6% from October by December.
But client spending, which accounts for about 70% of U.S. financial exercise, remained resilient, rising at a 3.7% annual tempo, the quickest such price in practically two years. Spending on items, particularly, was strong: It rose at its quickest tempo for the reason that second quarter of 2021.
Economists had been anticipating general GDP to develop at a 1.9% tempo within the January-March quarter. Behind a lot of the quarter’s weak point was a pointy discount in enterprise inventories, which subtracted roughly 2.3 share factors from general progress. Companies usually slash their inventories after they anticipate a coming downturn.
The economic system’s slowdown displays the affect of the Federal Reserve’s aggressive drive to tame inflation, with 9 rate of interest hikes over the previous 12 months. The surge in borrowing prices is predicted to ship the economic system right into a recession someday this 12 months. Though inflation has steadily eased from the four-decade excessive it reached final 12 months, it stays far above the Fed’s 2% goal.
The housing market, which is very susceptible to greater mortgage charges, has been battered. And many banks have tightened their lending requirements for the reason that failure final month of two main U.S. banks, making it even more durable to borrow to purchase a home or a automobile or to increase a enterprise.
“The economy had less forward momentum at the start of this year than previously thought,” Andrew Hunter of Capital Economics wrote in a analysis notice. “We proceed to count on the drag from greater rates of interest and tightening credit score situations to push the economic system into a gentle recession quickly.″
Many economists say the cumulative affect of the Fed’s price hikes has but to be totally felt. Still, the central financial institution’s policymakers are aiming for a so-called smooth touchdown: Cooling progress sufficient to curb inflation but not a lot as to ship the world’s largest economic system tumbling right into a recession.
There is widespread skepticism that the Fed will succeed. An financial mannequin utilized by the Conference Board, a enterprise analysis group, places the likelihood of a U.S. recession over the following 12 months at 99%.
The Conference Board’s recession-probability gauge had hung round zero from September 2020, because the economic system rebounded explosively from the COVID-19 recession, till March 2022, when the Fed began elevating charges to combat inflation.
Thursday’s GDP report was the primary of three estimates the Commerce Department will make of progress within the January-March quarter. Economists count on progress to additional weaken within the present April-June quarter — to only a 0.3% annual tempo, in response to the most recent survey by the information agency FactSet.
A key query is whether or not — and by how a lot — client spending will weaken. Retail gross sales had loved a robust begin in January, aided by warmer-than-expected climate and greater Social Security checks. But in February and once more in March, retail gross sales tumbled, suggesting that buyers have been tiring as the primary quarter of the 12 months got here to an finish.
Even so, some economists have been impressed that spending has held up in addition to it has even after 9 Fed price hikes have led to greater prices for loans starting from mortgages and auto purchases to bank cards and company borrowing.
“The focus is on the weak top-line (GDP) number, but the economy remains resilient,’ said Robert Frick, an economist at Navy Federal Credit Union. “Businesses have underestimated both consumer buying and business buying.”
The worst fears of a 2008-style monetary disaster have eased over the previous month. But lingering credit score cutbacks, which have been talked about within the Fed’s survey this month of regional economies, is more likely to hobble progress.
Political dangers are rising, too. Congressional Republicans are threatening to let the federal authorities default on its money owed, by refusing to lift the statutory restrict on what it may possibly borrow, if Democrats and President Joe Biden fail to comply with spending restrictions and cuts. A primary-ever default on the federal debt would shatter the marketplace for U.S. Treasurys — the world’s largest — and presumably trigger a world monetary disaster.
The international backdrop can also be trying bleaker. The International Monetary Fund this month downgraded its forecast for worldwide financial progress, citing rising rates of interest all over the world, monetary uncertainty and power inflation. American exporters might endure as a consequence.
Still, the U.S. economic system has shocked earlier than. Recession fears rose early final 12 months after GDP had shrunk for 2 straight quarters. But the economic system roared again within the second half of 2022, powered by surprisingly sturdy client spending.
A powerful job market has given Americans the arrogance and monetary wherewithal to maintain procuring: 2021 and 2022 have been the 2 finest years for job creation on document. And hiring has remained robust thus far this 12 months, although it has decelerated from January to February after which to March.
The jobs report for April, which the federal government will situation on May 5, is predicted to point out that employers added a good however still-lower complete of 185,000 jobs this month, in response to a survey of forecasters by FactSet.
Source: www.bostonherald.com”