US economic growth slows as firms cut investment

 

The US economy slowed in the first three months of the year, as businesses reduced investments in the face of higher borrowing costs.

The economy grew 1.1% on an annualised basis, the Commerce Department said.

That was down from a rate of 2.6% in the prior quarter, despite strong consumer spending.

Analysts are watching nervously to see how the world's largest economy handles a mix of higher interest rates and rising prices.

The latest report on gross domestic product - the widest measure of economic activity - showed the economy has now grown for three quarters in a row.

The US economy had contracted in the first half of last year as trade flows adjusted from the pandemic and higher borrowing costs led to a sharp slowdown in home sales.

But a strong job market has kept consumer spending - the main driver of economic activity - resilient, despite rising living costs, helping to defy predictions of a recession.

Spending was up 3.7% on an annual basis in the January-to-March period. 

US President Joe Biden has cast the slowdown as a necessary adjustment after the boom following the reopening from the pandemic.

"Today, we learned that the American economy remains strong, as it transitions to steady and stable growth," he said in a statement following the report.

However, many forecasters still expect the US to fall into economic recession sometime this year.

"Overall, the data confirm the message from other indicators that while economic growth is slowing, it isn't yet collapsing," said Andrew Hunter, deputy chief US economist for Capital Economics.

"Nevertheless, with most leading indicators of recession still flashing red and the drag from tighter credit conditions still to feed through, we expect a more marked weakening soon."

The US central bank has pushed interest rates to more than 4.75%, from near zero last March, moving aggressively to try to slow the economy and ease the pressures pushing up prices.

Since the campaign started, inflation - the rate at which prices rise - has dropped back, falling to 5% in March, but it remains higher than the bank's 2% target.

Meanwhile firms - especially in sectors such as housing, finance and tech where low borrowing costs had fuelled growth - have been growing more cautious.

Recent weeks have been marked by announcements of job cuts from many big businesses, including consultancy Deloitte, manufacturer 3M, retailer Gap and tech giant Meta.

Thursday's report showed the biggest drop in business investment in equipment since the pandemic in 2020, falling 7.3% on an annual basis.

Analysts say they expect further pain ahead as the job market weakens and banks grow more wary of lending after a string of US bank failures last month.

Retail sales have already slowed since the start of the year and consumer confidence has taken a hit.

"GDP growth is being held up largely by the consumer at present, but growth in consumer spending appears to have lost momentum over the past month or two," Wells Fargo economist Jay Bryson said.

"We forecast that the US economy to slip into recession, which we expect to be of moderate severity, in the second half of the year."

US economic growth slowed sharply in the first quarter of 2023 despite strong consumer spending, as the Federal Reserve ploughed ahead with its historic monetary tightening campaign.

Economy grew 1.1 per cent on an annualised basis between January and March, according to preliminary data released by the commerce department on Thursday. That marked an abrupt deceleration from the 2.6 per cent pace registered in the final three months of last year and came in well below economists’ expectations of a 2 per cent increase. US government bonds sold off after the data was released, pushing the two-year Treasury yield — which closely tracks interest rate expectations — up 0.13 percentage points to 4 per cent. The benchmark 10-year yield rose 0.09 percentage points to 3.52 per cent.

Thursday’s GDP figures showed that the US economy continued to exhibit pockets of strength even though its momentum ebbed. Strong consumption growth over the three-month period offset a drag from inventories and a slowdown in housing and business investment. “I actually thought it was a fairly positive GDP report,” said Kristina Hooper, chief global markets strategist at Invesco. “Really peeling back the layers, it is very positive in terms of consumer spending,” she added. “Now of course, in this environment in which the Fed dominates markets, any good news one worries could be bad news. So seeing a robust amount of consumer spending can raise concerns that is going to fuel more Fed rate hikes.” Inflation-adjusted consumer spending rose at a 3.7 per cent annual rate, up from 1 per cent in the last quarter of the year. Private domestic investment fell nearly 13 per cent. Final sales to private domestic purchasers — a measure of consumer and business spending considered one of the most important proxies for underlying demand — rose at an annualised rate of 2.9 per cent in the first three months of the year. That followed muted gains last year with no change in the fourth quarter of 2022.

 

“At first glance this looks like a fairly robust GDP report despite the weak headline number,” said Aditya Bhave, senior US economist at Bank of America. “The concern is that a lot of the strength was driven by what happened in January.” “The handoff to the second quarter doesn’t look particularly encouraging,” he added. The broader growth slowdown comes as the Fed has pursued a year of aggressive monetary tightening in an effort to damp demand. Since March last year, the US central bank has lifted its benchmark policy rate from near zero to just under 5 per cent, the fastest increase in decades. Officials are poised to deliver another quarter-point rate rise next week, which would lift the federal funds rate to a new target range of 5 per cent to 5.25 per cent, before considering a pause in their rate-rising campaign. A pause from June would allow Fed policymakers to assess the impact of their actions over the past year as well as the severity of the credit crunch stemming from the recent banking turmoil that chair Jay Powell has previously said could have the same effect as rate tightening. But some officials have not ruled out further action by the Fed if warranted by the data. What has kept officials on edge is the surprising resilience of the consumer, which has been buoyed by a tight labour market. But nascent signs of a cooling in monthly jobs gains and wage growth have provided some comfort that the worst of the inflation shock has passed and that the Fed is moving closer to getting price pressures under control. 

Officials maintain that, to return inflation to the Fed’s longstanding 2 per cent target, it will require a period of “below-trend growth and some softening in labour market conditions”, but they have stopped short of forecasting a recession. As of March, most officials expect inflation-adjusted GDP growth to slow to 0.4 per cent in 2023, before rebounding to 1.2 per cent the following year. The unemployment rate, meanwhile, is projected to peak at 4.6 per cent in 2024, according to most officials, up from its current level of 3.5 per cent. 

“Our view has been that the economy has been heading for a recession going back for almost nine months now,” said Josh Jamner, investment strategy analyst at ClearBridge Investments. “I think we’re probably getting closer to that. We think a recession is [likely] in the back half of this year.” In a statement released on Thursday, president Joe Biden touted the report, saying it showed the US economy “remains strong, as it transitions to steady and stable growth”.