Withstanding the test of elevated interest rates, the U.S. economy demonstrated its mettle, registering a 2% annual growth rate from January through March.
This growth narrative, supported by the most vigorous consumer spending witnessed in nearly two years, contributes a new chapter to the American economic story.
Decoding the upgraded growth estimate of U.S. economy
The latest figures from the Commerce Department provide an optimistic revision to the first-quarter growth, adjusting it upwards from the earlier estimated 1.3% annual rate.
Despite this upgrade, the performance paints a slower picture compared to the 2.6% and 3.2% growth rates from the last two quarters of 2022.
This deceleration is largely attributed to the Federal Reserve’s relentless endeavors to keep inflation in check through successive interest rate hikes initiated in early 2022.
However, the GDP numbers provide a telling story of resilience. Consumer spending, a critical driver representing approximately 70% of the economy, soared at a 4.2% annual rate in the first quarter.
This was the highest since the second quarter of 2021. The first quarter also saw a substantial increase in petroleum and other exports, further bolstering the growth estimate.
Despite a reduction in business inventories negatively affecting the quarter’s growth rate, the economy demonstrated decent expansion.
Weathering the inflation storm
The Federal Reserve has increased its benchmark interest rate ten times since March 2022 to combat inflation, which soared to a high of 9.1% last year but has now slowed to 4%.
This has triggered higher costs for mortgages, auto loans, credit cards, and business borrowing, leading to widespread predictions of an imminent economic downturn.
The American economy, however, has shown surprising tenacity. In spite of inflationary pressures and rising borrowing costs, retail sales saw an increase.
Other indicators like new home sales and orders for long-lasting manufactured goods also experienced gains. The job market too remains robust, with an average of 314,000 jobs added per month this year, and the unemployment rate at a near half-century low of 3.7%.
For the current quarter, April through June, the economy is expected to slow down further but continues to demonstrate growth. Forecasts by FactSet predict an annual growth rate of 1%.
The bigger picture
This stronger-than-anticipated growth in the first quarter, as reported by the Commerce Department, defies recessionary fears.
Consumer spending, measured by personal consumption expenditures, saw a surge of 4.2%, the highest quarterly pace since the second quarter of 2021. Exports, too, saw a rise of 7.8% after a decline in the last quarter of 2022.
However, it’s not all smooth sailing, and risks remain. Despite the resilient economy, the potential for a recession cannot be entirely ruled out. Federal Reserve’s continuing rate hikes aim to temper an economy that was generating record inflation levels in the summer of 2022.
The labor market, a specific concern for the Fed, sees roughly 1.7 open positions for every available worker, leading to upward pressure on wages that generally have not kept pace with inflation.
The revised GDP numbers paint a picture of an economy resilient in the face of challenges and resistant to predictions of recession. As we move forward, all eyes will remain on the continued impacts of interest rate hikes and inflation on the economy’s performance.