WASHINGTON (AP) — The U.S. economy grew at a sluggish 1.3% annual pace from January through March, the weakest quarterly rate since the spring of 2022, the government said Thursday in a downgrade from its previous estimate. Consumer spending rose but at a slower pace than previously thought, a sign that high interest rates and lingering inflation are pressuring household budgets.
The Commerce Department had previously estimated that the nation’s gross domestic product — the total output of goods and services — expanded at a 1.6% rate last quarter.
The first quarter's GDP growth marked a sharp slowdown from the vigorous 3.4% rate in the final three months of 2023.
But last quarter's pullback was due mainly to two factors — a surge in imports and a reduction in business inventories — that tend to fluctuate from quarter to quarter. Thursday's report showed that imports subtracted more than 1 percentage point from last quarter's growth. A reduction in business inventories took off nearly half a percentage point.
By contrast, consumer spending, which fuels about 70% of economic growth, rose at a 2% annual rate, down from 2.5% in the first estimate and from 3%-plus rates in the previous two quarters. Spending on goods such as appliances and furniture fell at a 1.9% annual pace, the biggest such quarterly drop since 2021.
Still, services spending rose at a healthy 3.9% clip, the most since mid-2021. And an uptick in business investment, led by housing, software and research and development, added more than 1 percentage point to first-quarter annual growth.
A measure of inflation in the January-March GDP report was revised slightly down from the government's original estimate. But price pressures still picked up in the first quarter. Consumer prices rose at a 3.3% annual pace, up from 1.8% in the fourth quarter of 2023 and the most in a year. Excluding volatile food and energy costs, so-called core inflation rose at a 3.6% clip, up from 2% in each of the previous two quarters.
The U.S. economy — the world's largest — has shown surprising durability since the Federal Reserve started jacking up interest rates more than two years ago in its drive to tame the worst outbreak of inflation in four decades. The much higher borrowing costs that resulted were expected to trigger a recession. But the economy has kept growing, and employers have kept hiring.
Still, the higher rates appear to be weighing on the economy.
"The impact of the Fed’s tight interest rate policy is clearly visible in the first quarter GDP report,'' said Bill Adams, chief economist at Comerica, pointing in particular to a sharp drop in purchases of long-lasting manufactured goods.