US Economy Slows More Than Expected in Q1 2023: Concerns Rise Over Risk of Recession
The US economy slowed more than expected in the first quarter of 2023, according to a report from the Commerce Department. Gross domestic product (GDP) grew at an annual rate of just 1.1% in the first three months of the year, compared with a 2.6% pace in the previous quarter, due to tepid business investment and a pullback in inventories. Consumer spending, which accounts for more than two-thirds of the economy, contributed the most to the first quarter’s growth, surging over the period. However, momentum slowed as the quarter progressed, raising concerns about the risk of recession.
The Federal Reserve has been aggressively hiking interest rates over the past year to control inflation, raising concerns about the impact on consumer and business spending. The report also revealed a 4.9% increase in the personal consumption expenditures price index, excluding food and energy prices, which is a closely watched inflation gauge for the Federal Reserve. Stripping out those components, inflation-adjusted final sales to private domestic purchasers jumped at the fastest pace since the second quarter of 2021, boosted by strong consumer spending.
However, the slowdown from the previous quarter resulted from a decline in business investment and residential fixed investment, which includes money spent on home buying and construction. Economists predict that the second quarter will reveal a more pronounced economic slump, with a projected GDP growth rate of a sluggish 0.2%.
Despite the risks of recession, consumers have remained resilient, spending robustly on goods and services, particularly in restaurants and bars. A strong jobs market, with an unemployment rate at 3.5%, is also expected to underpin growth. Some analysts predict that consumers will use excess savings and purchasing power to make the economic contraction short and shallow.
The outlook for the economy remains uncertain and largely depends on the resiliency of the job market. Still, many economists, including those at the Federal Reserve, expect the cumulative effect of monetary tightening, a retrenchment in business investment, a slowdown in consumer spending and tightening credit conditions to ultimately tip the economy into a downturn.
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