US growth likely slowed last quarter but still pointed to a solid economy

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WASHINGTON (AP) — After a strong end to 2023, the U.S. economy is believed to have extended its surprisingly healthy streak at the start of this year, with consumers continuing to spend freely despite pressure from rising interest rates.

The Commerce Department is expected to announce Thursday that gross domestic product — the economy's total output of goods and services — grew at a slow but still decent annual pace of 2.2% in the January-March period, according to a survey of forecasters by the data firm. FactSet.

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Some economists envision an even stronger expansion. The Atlanta Fed's forecast model suggests a first-quarter annualized pace of 2.7%, driven by a 3.3% increase in consumer spending, the main driver of economic growth.

Either way, the economy's growth is widely expected to slow from the strong annual pace of 3.4% in the October-December period. The slowdown reflects, in large part, much higher borrowing rates for home and auto loans, credit cards and many business loans that resulted from 11-fold interest rate hikes imposed by the Federal Reserve in its campaign to tame inflation.

However, the United States continued to outperform the rest of the world's advanced economies. The International Monetary Fund expects the world's largest economy to grow 2.7% for all of 2024, up from 2.5% last year and more than double the growth the IMF expects this year for Germany, France, Italy, Japan, the United Kingdom and the United Kingdom. Canada.

Americans, who emerged from the pandemic recession with plenty of spare cash, have been spending aggressively, an important trend because consumers account for nearly 70% of the country's gross domestic product. From February to March, retail sales rose 0.7% — nearly double what economists expected.

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Companies are pouring money into factories, warehouses and other buildings, encouraged by federal incentives to make computer chips and green technology in the United States. On the other hand, their spending on equipment was poor. With imports outpacing exports, international trade is also believed to have acted as a drag on the economy's growth in the first quarter.

Kristalina Georgieva, executive director of the International Monetary Fund, warned last week that the “flip side” of strong economic growth in the United States is that it is “taking longer than expected” for inflation to reach the Fed’s 2% target, although… Price pressures slowed sharply from the middle. -Peak 2022.

Inflation flared in the spring of 2021 as the economy rebounded unexpectedly quickly from the COVID-19 recession, causing severe supply shortages. Russia's invasion of Ukraine in February 2022 made matters dramatically worse by inflating the prices of energy and grains on which the world depends.

The Fed responded by aggressively raising its benchmark interest rate between March 2022 and July 2023. Despite widespread expectations of a recession, the economy proved unexpectedly resilient. Economic growth has come at a 2% annual rate for six straight quarters — seven, if forecasts for January-March GDP growth hold true.

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Employment so far this year is stronger than in 2023. Unemployment has remained below 4% for 26 straight months, the longest such streak since the 1960s.

“Overall, U.S. economic activity remains resilient, supported by consumers’ continued ability and willingness to spend,” said Gregory Daco, chief economist at tax and consulting firm EY. “A strong labor market, coupled with positive real wage growth, continues to provide a solid foundation.”

Inflation, the main source of Americans' discontent with the economy, slowed from 9.1% in June 2022 to 3.5%. But progress has stalled recently. Republican critics of President Joe Biden have sought to blame the price hikes on the president and use that as a cudgel to derail his re-election bid. Polls show that despite a healthy labor market, a near-record high stock market and a sharp slowdown in inflation, many Americans blame Biden for rising prices.

Although Fed policymakers indicated last month that they expect to cut interest rates three times this year, they have recently indicated that they are in no rush to cut rates in the face of persistent inflationary pressures. Now, the majority of Wall Street traders don't expect it to start until the Fed's September meeting, according to the CME FedWatch tool.

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AP Economic Writer Christopher Rugaber contributed to this report.

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