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Business

US economic growth slows in the first quarter as companies reduce inventories




  • GDP in the first quarter increases by 1.1 per cent
  • Consumer spending accelerates; business investment lukewarm
  • Weekly jobless claims fall 16,000 to 230,000

WASHINGTON, April 27 (Reuters) – U.S. economic growth slowed more than expected in the first quarter as an acceleration in consumer spending was offset by businesses winding down inventories in anticipation of weaker demand later this year amid higher borrowing costs.

The first decline in private inventories in 1-1/2 years reported by the Commerce Department in its snapshot of first-quarter gross domestic product on Thursday is potentially good news for the economy this quarter as it faces a possible year-end recession. There had been fears that a correction of the inventory inflation would result in a sharper economic downturn.

The decline last quarter raised hopes that businesses were close to getting rid of unwanted inventory, which would put them in a better position to rebuild inventory should the need arise.

“Leaner inventories mean second-quarter GDP is on a solid footing,” said Chris Low, chief economist at FHN Financial in New York. “Of course, what is built on this foundation depends on many things, including job and income growth as well as confidence and credit availability.”

Gross domestic product increased at an annual rate of 1.1% last quarter, the government said in its advance estimate for first-quarter GDP growth. The economy grew by 2.6% in the fourth quarter. Economists polled by Reuters had predicted an increase in GDP of 2.0 percent.

Investments in private inventories fell $1.6 billion, the first decline since the third quarter of 2021. The decline, led by wholesalers and manufacturers, followed a $136.5 billion increase in the fourth quarter.

Economists said the drawdown appeared to be both planned as businesses were likely reluctant to add to inventories of unsold goods and a result of stronger consumer spending.

Inventories cut 2.26 percentage points off GDP growth, the most in two years, after adding 1.47 percentage points in the previous quarter. Business expenditure on equipment fell for the second quarter in a row. Overall business investment was tepid, likely due to reduced profit margins.

GDP contributors

Housing investment recorded its eighth consecutive quarterly fall, although the decline slowed considerably from the October-December period. Government spending picked up, while a smaller trade deficit contributed to GDP growth for the fourth consecutive quarter.

Excluding inventories, trade and government spending, the economy grew at a rate of 2.9%, the fastest since the second quarter of 2021. The increase in this measure of domestic demand, which was flat in the fourth quarter, was driven by a rate of 3.7 %. of the increase in consumption expenditure after the October-December period’s pedestrian 1.0% increase.

The jump in consumer spending, which accounts for more than two-thirds of US economic activity, was led by increased purchases of motor vehicles as well as health care spending and Americans visiting restaurants and staying in hotels.

The acceleration was accompanied by an increase in inflation. A measure of inflation in the economy, the price index for gross domestic purchases, rose 3.8% after rising 3.6% in the fourth quarter. One of the measures tracked by the Federal Reserve, the core PCE price index jumped 4.9% after advancing 4.4% in the previous quarter.

The Fed is expected to raise interest rates by another 25 basis points next week, potentially the latest increase in the US central bank’s fastest monetary tightening cycle since the 1980s. The Fed has increased its key interest rate by 475 basis points since last March from the near-zero level to today’s range of 4.75%-5.00%.

Stocks on Wall Street traded higher. The dollar rose against a basket of currencies. US Treasury bond prices fell.

GDP consumer contribution

THE LABOR MARKET IS STRICT

Consumer spending last quarter, which was frontloaded in January, was driven by an 8.0% rise in household disposable income after adjusting for inflation.

The disposable income was lifted by strong wage growth, and an increase in public social benefits. The savings rate increased to 4.8% from 4.0% in the fourth quarter.

But retail sales fell in February and March, while wage growth is slowing and most of the increase in social benefits income has faded, leading to slow growth in consumption in the second quarter.

“The transition to second-quarter spending is soft and the outlook for the consumer for the rest of 2023 is unclear,” said Michael Gapen, chief U.S. economist at Bank of America Securities in New York.

Nevertheless, consumer spending is still underpinned by a tight labor market, characterized by an unemployment rate of 3.5%. A separate report from the Ministry of Labor on Thursday showed that initial claims for state unemployment benefits were reduced by 16,000 to a seasonally adjusted 230,000 for the week ending 22 April.

However, reduced access to credit for businesses and households is seen to harm demand and ultimately employment. There is also speculation that slow business investment could signal a change in corporate behaviour, which could affect employment.

The number of people receiving benefits after a first week of assistance, a proxy for employment, fell 3,000 to 1.858 million in the week ended April 15, the claims report showed.

The so-called ongoing claims data covered the period when the government surveyed households for April unemployment. They rose moderately between the survey periods March and April.

Unemployed claims

Economists are cautiously optimistic that any recession will be mild. Others believe that a downturn can be avoided entirely. They noted that fears of a recession pushed down the prices of commodities such as oil, which could help reduce cost pressures for businesses and benefit the overall economy.

Oil prices have erased all their gains since the Organization of the Petroleum Exporting Countries and allied producers Russia announced in early April a further output cut until the end of the year.

“A US recession is likely to start in the second half of this year,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “However, it should be mild, as the consumer balance sheet remains strong and the tight labor market will discourage layoffs.”

Reporting by Lucia Mutikani; Editing by Andrea Ricci

Our standards: Thomson Reuters Trust Principles.



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