U.S. Growth May Have Slowed in the Last Quarter but Still Pointed to a Solid Economy

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WASHINGTON (AP) — After a robust end to 2023, the U.S. economy may have continued its surprisingly healthy streak earlier this year as consumers still spend freely despite pressure from high interest rates.

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

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Some economists expect a stronger expansion. A forecast model released by the Federal Reserve Bank of Atlanta suggests an annual pace of 2.7% in the first quarter, driven by a 3.3% increase in consumer spending, the main driver of economic growth.

In any case, economic growth is widely expected to have slowed from the robust annual pace of 3.4% in October-December. The slowdown is due in large part to much higher borrowing rates on home and auto loans, credit cards and many business loans, resulting from the 11 rate hikes imposed by the Federal Reserve in its effort to curb inflation.

Yet the United States has continued to outpace the rest of the world’s developed economies. The International Monetary Fund has forecast the world’s largest economy will grow 2.7% throughout 2024, up from 2.5% last year and more than double the growth the IMF predicted this year for Germany, France , Italy, Japan, the United Kingdom and the United Kingdom awaits Canada.

Americans, who emerged from the pandemic recession with plenty of cash reserves, have been spending vigorously, a significant trend since consumers account for about 70% of the country’s GDP. From February to March, retail sales rose 0.7% – almost twice as much as economists expected.

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Companies have poured money into factories, warehouses and other buildings, encouraged by government incentives to produce computer chips and green technology in the United States. On the other hand, their spending on equipment was weak. And since imports exceed exports, international trade is also likely to have slowed economic growth in the first quarter.

Kristalina Georgieva, the IMF’s managing director, warned last week that the “downside” of strong U.S. economic growth was that it was taking “longer than expected” for inflation to reach the Fed’s 2 percent target, even though the Price pressure has eased significantly since its midpoint – peaking in 2022.

Spring 2021 saw a spike in inflation as the economy recovered from the COVID-19 recession at unexpected speed, leading to severe supply shortages. Russia’s invasion of Ukraine in February 2022 significantly worsened the situation by driving up prices for energy and grain on which the world depends.

The Fed responded by aggressively raising its key interest rate between March 2022 and July 2023. Despite widespread recession predictions, the economy has proven unexpectedly resilient. Economic growth has been 2% per year for six straight quarters – seven if forecasters are right about January-March GDP growth.

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

“Overall, U.S. economic activity remains robust, driven by consumers’ continued ability and willingness to spend,” said Gregory Daco, chief economist at tax and advisory firm EY. “A robust labor market and positive real wage growth continue to provide a solid foundation.”

Inflation, the leading cause of Americans’ dissatisfaction with the economy, fell to 3.5% from 9.1% in June 2022. But progress has stalled recently. Republican critics of President Joe Biden have tried to pin the blame for the high prices on the president and use him as a cudgel to prevent his re-election. Polls show that despite a healthy job market, a stock market that is near record highs and the sharp slowdown in inflation, many Americans are placing blame for high prices on Biden.

Although Fed policymakers signaled last month that they expect to cut rates three times this year, they recently signaled that they are in no rush to cut rates given ongoing inflationary pressures. According to the CME FedWatch tool, the majority of Wall Street traders now do not expect to start before the Fed’s September meeting.

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AP Economics writer Christopher Rugaber contributed to this report.

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