WASHINGTON – The US economy likely continued to grow at a solid clip in the first quarter, driven by strong consumer spending at the beginning of the year, but momentum appears to have since waned considerably as the effects of higher interest rates spread.
The Commerce Department’s advance first-quarter gross domestic product report on Thursday will probably show the economy nowhere near a recession. But the economic landscape is now vastly different. Credit conditions have tightened following recent financial market turmoil, which together with the Federal Reserve’s fastest rate hiking cycle since the 1980s have raised the risks of a downturn by the second half of the year.
Following January’s surge, which economists attributed to unseasonably mild weather and difficulties adjusting the data for seasonal fluctuations, economic reports have taken a weaker tone, with retail sales slumping in February and March.
“It is worth considering where the momentum is at the end of the quarter,” said Will Compernolle, macro strategist at FHN Financial in New York. “A lot of the first quarter is just kind of a previous chapter of the economy because now we’re into the post bank tensions world where a lot of businesses could be expressing kind of a hesitancy to invest or they could be facing tighter credit conditions.”
According to a Reuters survey of economists, GDP growth likely increased at a 2.0 percent annualized rate last quarter after rising at a 2.6 percent pace in the fourth quarter. Estimates ranged from a growth rate of 0.4 percent to a 3.3 percent pace.
The pace of growth remains above the economy’s potential, keeping the US central bank on track to raise interest rates by another 25 basis points next week. The Fed has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75 percent-5.00 percent range.
The survey was, however, conducted before the Commerce Department published its annual revisions to retail sales data this week, which showed sales not as robust as previously estimated in January. Retail sales in February were much weaker than previously reported.
In addition, orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, fell for a second straight month in March, the Commerce Department reported on Wednesday.
Some institutions cut their GDP growth estimates, with Wells Fargo slashing its forecast by a full percentage point.
“If our interpretation of the latest revisions is correct, then real GDP growth for the first quarter could come in at half the growth rate that is presently expected by the consensus,” said Jay Bryson, chief economist at Wells Fargo in Charlotte, North Carolina.
Still, consumer spending is expected to have grown at a pace faster than the pedestrian 1.0 percent rate logged in the fourth quarter. Consumer spending, which accounts for more than two-thirds of US economic activity, is expected to be driven by demand for services. It continues to be underpinned by a tight labor market, characterized by a 3.5 percent unemployment rate.
A separate report from the Labor Department on Thursday is expected to show initial claims for state unemployment benefits rising to a seasonally adjusted 248,000 last week from 245,000 the prior week, according to a Reuters survey.
Though claims, which have increased since March, remain well below levels that could raise alarm about the labor market, reduced access to credit for business and households is seen hurting demand and ultimately employment.
