Gross Domestic Product

Higher interest rates took a toll on the U.S. economy in early 2023, but free-spending consumers are keeping a recession at bay, at least for now.

Gross domestic product, adjusted for inflation, rose at a 1.1 percent annual rate in the first quarter, the Commerce Department said on Thursday. That was down from a 2.6 percent rate in the last three months of 2022 but nonetheless represented a third straight quarter of growth after output contracted in the first half of last year.

The figures are preliminary and will be revised at least twice as more complete data becomes available.

Growth in the first quarter was dragged down by weakness in housing and business investment, both of which are heavily influenced by interest rates. The Federal Reserve has raised rates by nearly five percentage points since early last year in an effort to tamp down inflation.

Consumers, however, have proved resilient in the face of both rising prices and higher borrowing costs. Inflation-adjusted spending rose at a 3.7 percent annual rate in the first quarter, up from 1 percent in the prior period. Consumers have been buoyed by a strong job market and rising wages, which have helped offset high prices. After-tax income rose at an 8 percent annual rate in the first quarter, adjusted for inflation.

Spending slowed as the quarter progressed, however, and forecasters warn that it could weaken further amid headlines about layoffs, bank failures and warnings of a possible recession. Savings rates have been edging higher, a sign that consumers may be growing more cautious, and more Americans are falling behind on debt payments, suggesting they may be struggling to keep up with rising prices.

“Consumer spending is still moving up, but I don’t know how long that can last,” said Ben Herzon, an economist at S&P Global Market Intelligence. “Confidence is weak and has been weakening. You’ve got to wonder, will that soon translate into a pullback in spending?”

A gradual slowdown would be welcomed by policymakers, who have been trying to cool off the economy enough to bring down inflation, but not by so much that it leads to widespread layoffs and unemployment. Fed officials will gather next week in Washington to decide whether to raise rates for the 10th meeting in a row.

“It’s not a free fall,” said Dana Peterson, chief economist at the Conference Board, a business group. “It’s a controlled descent, and that’s what the Fed is trying to achieve with higher interest rates.”

Still, the data released Thursday mostly predated the collapse of Silicon Valley Bank and the financial turmoil that followed. And there are more threats on the horizon, including a looming debt-ceiling showdown that could further destabilize financial markets. Early forecasts suggest that G.D.P. growth is likely to slow further in the second quarter, and many analysts think a recession is likely later this year.

“If we do have a shock, if we do have a debt ceiling debacle or something like that, that raises the probability in my mind that we go into a recession,” said Jay Bryson, chief economist for Wells Fargo.

Source: Ben Casselman - The New York Times