New data from the Bureau of Economic Analysis revealed that US GDP grew by 1.1% in the quarter. This is far below the 2% that economists polled by Bloomberg had expected, and a dramatic deceleration from the 2.6% growth the US economy registered in the fourth quarter of last year.
Fortunately for the US, though: The slowdown isn’t in the areas of the economy that would tip the country into a recession.
What caused the slowdown in US GDP?
The GDP slowdown was largely because companies eased off their additions to their inventory and their investments in structures and equipment. The decrease in inventory investment was led by companies in the wholesale trade and manufacturing sectors.
“Growth pessimists will need to find something outside of inventories and housing to pitch their recession views,” Neil Dutta, head of Renaissance Macro Research, a brokerage firm, wrote on Twitter. “Over the last year, we have seen residential investment and inventories cut GDP by a full percentage point each. Sorry, this will not continue.”
Dutta told Quartz in an email that companies are still recovering from overbuilding their inventories during the pandemic, at a time when consumers still spent their money on goods rather than services. Since then, though, services have reigned—leaving inventories overfull.
Consumers are spending more and exports are up
Meanwhile, consumer spending and exports accelerated, although investment in housing grew slower than expected. The total spending of private businesses and consumers (excluding inventories and trade) moved up by 3.2%—which is the fastest that measure has grown since the second quarter of 2021.
During the first quarter, sales of motor vehicles and parts increased significantly, as dealer inventories expanded and shoppers capitalized on the unusually mild weather to make purchases, said Bill Adams, chief economist for Comerica Bank, in an emailed statement.
What will the GDP report mean for interest rates?
The weaker-than-expected GDP report doesn’t necessarily signal a coming pause in the Federal Reserve’s rate-tightening agenda. Economists polled by Bloomberg anticipate that the recent strain in the US banking sector will result in a credit tightening that is twice as acute as as the one predicted by Fed chair Jerome Powell.
GDP data is also backward-looking, which means that it doesn’t say much about the strength of consumer spending now. In March, US retail sales fell by 0.1%, showing that consumer spending might not stay as strong as it was in the first two months of GDP.