US growth likely slowed last quarter but still pointed to solid economy

Coming off a robust end to 2023, the U.S. economy is thought to have extended its surprisingly healthy streak at the start of this year, with consumers still spending freely despite the pressure of high interest rates.

The Commerce Department is expected to report Thursday that the gross domestic product — the economy's total output of goods and services — grew at a slow but still-decent 2.2% annual pace from January through March, according to a survey of forecasters by the data firm FactSet.

Some economists envision a stronger expansion than that. A forecasting model issued by the Federal Reserve Bank of Atlanta points to a first-quarter annual pace of 2.7%, propelled by a 3.3% increase in consumer spending, the principal driver of economic growth.

Either way, the economy's growth is widely expected to have decelerated from the vigorous 3.4% annual pace of October through December. The 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 Federal Reserve imposed in its drive to tame inflation.

Even so, the United States has continued to outpace the rest of the world's advanced economies. The International Monetary Fund has projected that the world's largest economy will grow 2.7% for all of 2024, up from 2.5% last year and more than double the growth the IMF expects this year for Germany, France, Italy, Japan, the United Kingdom and Canada.

Americans, who emerged from the pandemic recession with plenty of money in reserve, have been spending energetically, a significant trend because consumers account for roughly 70% of the nation's GDP. From February to March, retail sales surged 0.7% — almost double what economists had expected.

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.

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% 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 resilient. Economic growth has come in at a 2% annual rate for six straight quarters — seven, if forecasters are correct about the January-March GDP growth.

Hiring so far this year is even stronger than it was in 2023. And unemployment has remained below 4% for 26 straight months, the longest such streak since the 1960s.

"Overall, US economic activity remains resilient, powered by consumers' ongoing ability and willingness to spend,'' said Gregory Daco, chief economist at the tax and consulting firm EY. "A robust labor market, along with positive real wage growth, continues to provide a solid foundation.''

Inflation, the main source of Americans' discontent about the economy, has slowed from 9.1% in June 2022 to 3.5%. But progress has stalled lately. Republican critics of President Joe Biden have sought to pin the blame for high prices on the president and use it as a cudgel to derail his re-election bid. Polls show that despite a healthy job market, a near-record-high stock market and the sharp slowdown in inflation, many Americans blame Biden for high prices.

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.