GDP report shows that the US economy is slowing down

The US economy faltered in the first months of 2023, growing at an annual rate of 1.1 percent, as higher interest rates and a banking crisis dragged down activity across sectors.

The latest figures, released Thursday by the Bureau of Economic Analysis, mark a sharp decline at a time when Wall Street is already bracing for recession, in part because of fears that the banking sector’s problems will limit lending.

“The economy is in a very troubling, difficult situation,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “All forward-looking measures point to a significant decline.”

Three years into the coronavirus recession — which stretched from February to April 2020, the steepest and shortest on record — the U.S. economy remains shaky but resilient. Businesses are hiring, people are getting paid, and families are continuing to spend.

But the weaknesses appear. The Federal Reserve’s aggressive fight against inflation is holding back much of the economy, including housing and industry. Although the labor market and consumer spending are robust, they are slowing. And there are growing fears that a withdrawal in the banks’ willingness to lend could freeze business investment and job creation. Many economists predict a recession later this year.

The economy stumbled after the banking crisis, which raised renewed fears of recession

“We are seeing increasing cracks in the economic foundation,” said Lydia Boussour, senior economist at EY-Parthenon who expects a mild slowdown in the coming months. “Consumer spending has been quite strong, but the report is backward-looking and overstates some of the strength of consumers and the overall economy. We know the economy lost momentum as the quarter progressed, setting the stage for weaker growth.”

Consumer spending, which makes up nearly 70 percent of the economy, helped lift the latest gross domestic product reading.

Although consumers have so far spent a lot of money, especially on dining out, travel and other services, there are signs that many may start to pull back. Credit card debt is piling up, and many Americans have been working through pandemic-related stimulus funds and other savings. That, combined with a pinch of inflation, is likely to put a damper on spending plans later this year. Overall, prices are 4.9 per cent higher than a year ago.

Inflation continues to cool as the Fed begins to worry about a “mild” recession

Nevertheless, the economy has remained surprisingly tough in recent months. Employment growth is off the breathless post-pandemic reopening pace, but it remains incredibly robust, with monthly job growth averaging 345,000 in the first three months of the year. Unemployment, at 3.5 percent, is close to the lowest in 50 years.

The tight labor market is particularly notable given the Fed’s sharp rate hikes, which aim to slow consumer demand in part by raising unemployment. Strong employment has also weighed on growth, at least so far, from the drag of a recent banking crisis spurred by the collapse of Silicon Valley Bank in March.

“Four months later, this year has already been a roller coaster,” said Claudia Sahm, an economist who served on the Council of Economic Advisers during the Obama administration. “We went from ‘Things are looking good’ at the beginning of 2023, to ‘Banks are collapsing, the bottom is falling out.’ And now we’re back to trying to figure out what’s going to happen. Where are we now? We know not.”

Inflation is falling. Why don’t people notice?

The Fed, which has raised interest rates nine times in the past year, is expected to do so again next week in hopes of slowing the economy enough to bring rates down. But there are also fears that activity could slow down too much, leading to job losses and recession.

This uncertainty weighs on both business owners and consumers. At Glass Slipper Concierge, a travel agency specializing in Disney vacations, families retreat to summer and fall vacations after months of splurging.

“Things are definitely slowing down,” said Jennifer Kozlow, a senior adviser at the company in the Orlando area. “Last year we felt like we were drinking from a fire hose. But this year, traveling is expensive and people are more worried about the economy. They say, “If I’m going to skip something, maybe I’ll skip the family trip to Disney.”

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