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A shopper carries bags in Las Vegas, on March 14.Ty O'Neil/The Associated Press

The U.S. economy grew at a lacklustre 1.3-per-cent annual rate from January through March as businesses wary of an economic slowdown trimmed their inventories, the government said Thursday in a slight upgrade from its initial estimate.

The government had previously estimated that the economy grew at a 1.1-per-cent annual rate last quarter.

The Commerce Department’s revised measure of growth in the country’s gross domestic product – the economy’s total output of goods and services – marked a deceleration from 3.2-per-cent annual growth from July through September and 2.6 per cent from October through December.

Despite the first-quarter slowdown, consumer spending, which accounts for around 70 per cent of America’s economic output, rose at a 3.8-per-cent annual pace, the most in nearly two years and an encouraging sign of household confidence. Specifically, spending on physical goods, such as appliances and cars, rose 6.3 per cent, also the fastest growth rate since April through June of last year.

A cutback in business inventories shaved 2.1 percentage points off January-March growth.

The steady slowdown in the country’s economic growth is a consequence of the Federal Reserve’s aggressive drive to tame inflation, with 10 interest-rate hikes over the past 14 months. Across the economy, the Fed’s rate increases have elevated the costs of auto loans, credit-card borrowing and business loans.

“Consumers – the critical lynchpin to the U.S. economy – are still spending, tapping into savings and credit to be able to do so,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors. “That can’t persist indefinitely though, raising the risk of a more pronounced slowdown or recession the longer the Fed’s battle with inflation drags on.”

With mortgage rates having doubled over the past year, the real estate market has already taken a beating: Investment in housing fell at a 0.2-per-cent annual rate from January through March. In April, sales of existing homes were 23 per cent below their level a year earlier.

As the Fed’s rate hikes have gradually slowed growth, inflation has eased from the four-decade high it reached last year. Still, consumer prices were up 4.9 per cent in April from a year earlier – well above the Fed’s 2-per-cent target.

The economy’s slowdown is widely expected to lead to a recession later this year. In addition to higher borrowing rates, the economy’s other obstacles include a cutback in lending as banks conserve cash after three big-bank failures in recent months.

There is also the looming risk that House Republicans will refuse to raise the statutory limit on what the government can borrow, if President Joe Biden and the Democrats don’t agree to sharp spending cuts. That would leave the Treasury unable for the first time to pay all its bills on time. Economists say a protracted debt default would cause downgrades of the U.S. credit rating and likely trigger a recession deeper and sooner than the one that is already expected.

For now, though, most sectors of the economy other than housing are showing surprising resilience. Retail sales have continued to rise. So have orders for manufactured goods.

Most significantly, the country’s job market remains fundamentally solid. In April, employers added 253,000 jobs, and the unemployment rate matched a 54-year low. The pace of layoffs remains comparatively low. And job openings, though declining, are still well above prepandemic levels.

While the U.S. economy remains durable for now, Europe’s largest economy, Germany, has fallen into a downturn. Its economy shrank unexpectedly in the first three months of this year, marking a second quarter of contraction that meets one definition of recession, data released Thursday show. Germany’s GDP declined by 0.3 per cent from January to March after a drop of 0.5 per cent during the final quarter of 2022.

Though employment in Germany rose in the first quarter and inflation has eased, higher interest rates will keep weighing on spending and investment, said Franziska Palmas, senior Europe economist for Capital Economics.