US economy grew by just 1.6% in the first quarter, a much slower pace than expected

The US economy cooled more than expected in the first quarter of the year, but remained healthy by historical standards. Economic growth has slowed steadily over the past 12 months, which bodes well for lower interest rates, but the Federal Reserve has made it clear it’s in no rush to cut rates.

Gross domestic product, which measures all the services and goods produced in the economy, measured an annualized rate of 1.6% in the first quarter, the Commerce Department reported Thursday. It was the weakest pace of growth since the second quarter of 2022 when the economy contracted.

That’s a steep slowdown from the fourth quarter’s 3.4% rate and also below the 2.2% rate economists projected, according to a FactSet poll. The figures are adjusted for seasonal swings and inflation.

A sharp increase in imports, which subtracts from GDP, contributed to the slowdown in growth from the fourth quarter, shaving off nearly an entire percentage point. Spending on imports jumped to a 7.2% rate from 2.2% in the fourth quarter.

A decrease in inventory investment in the private sector also weighed on the economy earlier this year. There was also a sharp slowdown in government spending.

Consumer spending, which accounts for the lion’s share of economic output, also slowed earlier this year, but it still fueled growth in the first quarter. A key gauge of demand in the economy — final sales to private domestic purchasers — remained strong in the January-through-March period, slowing only slightly from the fourth quarter.

The Dow tumbled by 500 points at the opening bell, the S&P 500 fell 1.3% and the Nasdaq Composite declined by 2%.

What this means for interest rates

Inflation slowed considerably last year, but the pace of its descent has stalled in recent months. That’s the main reason why the Fed isn’t planning to cut interest rates imminently, but the economy’s resilience is also reassuring central bankers that they can afford to sit still and wait for inflation to budge lower. Fed officials will begin to cut rates once they’re convinced that inflation is under control and is on track to their 2% target — but they could also reduce rates sooner than expected if the economy suddenly falters.

For now, economic growth remains healthy, despite the weaker-than-expected first-quarter GDP reading, as employers continue to hire at a solid clip and workers still command robust wage gains. Economists and Fed policymakers are still widely expecting that momentum to slow even further this year, with interest rates perched at a two-decade high, but a recession this year isn’t in the cards.

“Consumers are becoming a bit more selective with what they purchase and how much of it because of the high interest-rate environment and because inflation remains high,” Oren Klachkin, financial market economist at Nationwide, told CNN. “But as long as the job market remains solid, they will continue to spend. That is more than compensating for the fact that there’s continued pressure from the inflation front and interest rates.”

The latest GDP reading dealt some damage to the narrative that the US economy might be overheating. For interest rates, that means rate cuts could begin sooner rather than later.

“The softer first read of Q1 GDP could shift — again — the Fed’s timetable for initiating the rate easing cycle, with July coming back into play,” Quincy Krosby, chief global strategist at LPL Financial, said in a note Thursday.

Federal Reserve officials meet next week to deliberate on their latest interest rate decision.

No alarm bells — yet

Americans are still opening up their wallets, which is keeping the economy afloat for now.

Consumer spending slowed in the first quarter to a 2.5% rate, down from the 3.3% rate in the fourth quarter, mainly driven by a pullback in goods spending. Household outlays were responsible for the majority of growth from January through March. With the job market still humming along, Americans are likely to continue to spend.

Visa, the world’s largest payment processor, beat estimates in its latest earnings results released this week, largely thanks to resilient spending.

“Consumer spend across all segments from low-to-high spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments,” Chris Suh, chief financial officer at Visa, said in an earnings call.

But there are some signs of stress. Credit card debt levels and delinquencies have been rising, which are gauges the Fed is paying close attention to.

Chicago Fed President Austan Goolsbee said recently that consumer debt levels aren’t yet “especially” high, but that an increase can sometimes be a harbinger for weakness on the horizon.

“If the delinquency rate of consumer loans starts rising, that is often a leading indicator for ‘things are about to get worse,’” he said Friday at a moderated panel hosted by the Society for Advancing Business Editing and Writing.

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