The US economy slowed sharply from January through March, decelerating to just a 1.1 per cent annual pace as higher interest rates hammered the housing market and businesses reduced inventories.
Thursday’s estimate from the Commerce Department showed that the nation’s gross domestic product — the broadest gauge of economic output — weakened after growing 3.2 per cent from July through September and 2.6 per cent from October through November.But consumer spending, which accounts for about 70 per cent of US economic activity, remained resilient, growing at a 3.7 per cent annual pace, the fastest quarterly pace in nearly two years.
Federal Reserve’s Aggressive Drive to Tame Inflation Sparks Economic Slowdown
The slowdown reflects the impact of the Federal Reserve’s aggressive drive to tame inflation, with nine interest rate hikes over the past year.
The surge in borrowing costs is expected to send the economy into a recession sometime this year. Though inflation has steadily eased from the four-decade high it reached last year, it remains far above the Fed’s 2 per cent target.
The housing market, which is especially vulnerable to higher loan rates, has been battered. And many banks have tightened their lending standards since the failure last month of two major US banks, making it even harder to borrow to buy a house or a car or to expand a business.
Many economists say the cumulative impact of the Fed’s rate hikes has yet to be fully felt. Yet the central bank’s policymakers are aiming for a so-called soft landing: Cooling growth enough to curb inflation yet not so much as to send the world’s largest economy tumbling into a recession.
There is widespread scepticism that the Fed will succeed. An economic model used by the Conference Board, a business research group, puts the probability of a US recession over the next year at 99 per cent.
The Conference Board’s recession-probability gauge had hung around zero from September 2020, as the economy rebounded explosively from the COVID-19 recession, until March 2022, when the Fed started raising rates to fight inflation.
Consumers, whose spending accounts for roughly 70 per cent of US economic output, seem to be starting to feel the chill. Retail sales had enjoyed a strong start in January, aided by warmer-than-expected weather and bigger Social Security checks. But in February and again in March, retail sales tumbled.
