US growth slowed sharply in the last quarter, to 1.6%, reflecting an economy put under pressure by high rates.

WASHINGTON– The country’s economy slowed sharply last quarter, to an annual rate of 1.6%, in the face of high interest rates, but consumers – the main engine of economic growth – kept their spending at a healthy pace .

The report released by the Commerce Ministry on Thursday said gross domestic product – the economy’s total output of goods and services – slowed in the January-March quarter from its rapid growth rate of 3.4 % during the last three months of 2023.

A sharp rise in imports, which are subtracted from GDP, reduced first-quarter growth by almost a percentage point. Growth was also held back by companies reducing inventories. Both of these categories tend to fluctuate wildly from quarter to quarter.

On the other hand, the main components of the economy still appear strong. Alongside households, businesses helped stimulate the economy in the last quarter thanks to a sustained pace of investment.

Import and inventory numbers can be volatile, so “there’s still a lot of positive underlying momentum,” said Paul Ashworth, chief North America economist at Capital Economics.

However, the economy continues to create price pressures, a constant source of concern for the Federal Reserve. A measure of inflation in Friday’s report accelerated to an annual rate of 3.4% from January to March, up from 1.8% in the final three months of 2023 and the biggest increase in a year. year. Excluding volatility in food and energy prices, so-called core inflation increased at a rate of 3.7%, compared to 2% in the fourth quarter of 2023.

From January to March, consumer spending grew at an annual rate of 2.5%, a solid pace although down from the rate of more than 3% in each of the previous two quarters. Americans’ spending on services — from movie tickets and restaurant meals to plane tickets and doctor visits — increased 4%, the fastest pace since mid-2021.

But they have reduced their spending on goods such as appliances and furniture. Spending in this category fell 0.1%, the first such decline since summer 2022.

Gregory Daco, chief economist at tax and consulting firm EY, noted that the underlying economy appears strong, although it is slowing from last year’s surprisingly brisk pace. The rise in imports, which largely explains the decline in growth in the first quarter, he noted, is “a sign of robust demand” from U.S. consumers for foreign products.

Still, Daco said “the dynamics of the economy are cooling.”

“This is unlikely to be a major downturn,” he said, “but we will likely see a slowdown in economic momentum due to greater consumer scrutiny of their spending .”

The state of the U.S. economy has captured Americans’ attention as the election season heats up. Although inflation has slowed sharply from a peak of 9.1% in 2022, prices remain well above their pre-pandemic levels.

Republican critics of President Joe Biden have sought to pin the blame for high prices on Biden and use it as a stick to derail his re-election bid. And polls show that despite a healthy job market, a near-record stock market and the sharp decline in inflation, many Americans blame Biden for high prices.

Last quarter’s GDP ended a streak of six consecutive quarters of annual growth of at least 2%. The 1.6% expansion rate was also the slowest since the economy slowed in the first and second quarters of 2022.

The gradual slowdown in the economy reflects, in large part, much higher borrowing rates for home and auto loans, credit cards and many business loans, resulting from the 11 interest rate hikes imposed by the Fed in its desire to control inflation.

Despite this, the United States continued to outpace the rest of the world’s advanced economies. The International Monetary Fund projects the world’s largest economy will 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 Canada.

Companies have poured 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 equipment spending was low. And as imports exceed exports, international trade also appears to have dampened the economy’s growth in the first quarter.

Kristalina Georgieva, Managing Director of the IMF, warned last week that the “downside” of strong US economic growth was that it was “taking longer than expected” for inflation to reach the 2% target. Fed, although price pressures have slowed sharply since their midpoint. -2022 pic.

Inflation soared in the spring of 2021 as the economy rebounded with unexpected speed from the COVID-19 recession, causing severe supply shortages. Russia’s invasion of Ukraine in February 2022 made the situation worse by increasing the prices of energy and grain on which the world depends.

The Fed responded by aggressively raising its benchmark rate between March 2022 and July 2023. Despite widespread predictions of a recession, the economy has proven surprisingly durable. Hiring so far this year is even stronger than it was in 2023. And unemployment has remained below 4% for 26 straight months, the longest such streak since the 1960s.

Inflation, the main source of Americans’ dissatisfaction with the economy, has slowed to 3.5% from 9.1% in June 2022. But progress has stalled lately.

Although Fed policymakers indicated last month that they planned to cut rates three times this year, they recently indicated that they were in no rush to cut rates in the face of lingering inflationary pressure. Now, the majority of Wall Street traders don’t expect them to start until after the Fed’s September meeting, according to the CME FedWatch tool.