By Lucia Mutikani
WASHINGTON (Reuters) – The US economy likely continued to grow at a solid pace in the first quarter, fueled by strong consumer spending earlier in the year, but momentum appears to have slowed significantly since then as the impact of higher interest rates spread.
The Commerce Department’s preliminary report on first-quarter gross domestic product on Thursday is likely to show that the economy is far from a recession. But the economic landscape is very different now. Credit conditions have tightened following the recent financial market turmoil, which combined with the Federal Reserve’s fastest rate hike cycle since the 1980s, has increased the risk of a downturn in the second half of the year.
After January’s surge, which economists attributed to unusually mild weather and difficulties adjusting the data for seasonality, economic reports have softened in tone, with retail sales tumbling in February and March.
“It’s worth thinking about where the momentum is at the end of the quarter,” said Will Compernolle, macro strategist at FHN Financial in New York. “Much of the first quarter is just sort of a previous chapter of the economy, as we’re now in the post-banking crisis tensions world where many companies could express some sort of reluctance to invest or face tighter credit conditions.”
According to a Reuters poll of economists, GDP growth likely rose by an annualized 2.0% in the most recent quarter, after rising 2.6% in the fourth quarter. Estimates ranged from a growth rate of 0.4% to 3.3%.
The pace of growth remains above the economy’s potential, keeping the US Federal Reserve on track to raise interest rates by another 25 basis points next week. The Fed has raised interest rates by 475 basis points since last March from near zero to the current range of 4.75% to 5.00%.
But the survey was conducted ahead of the Commerce Department’s release of its annual revisions to retail sales data this week, which showed sales weren’t as resilient as previously estimated in January. Retail sales in February were much weaker than previously reported.
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In addition, orders for non-defense capital goods excluding aircraft, a closely watched indicator of companies’ spending plans, fell for the second straight month in March, the Commerce Department reported on Wednesday.
ADVERSE RISK
Some institutions cut their GDP growth estimates, and Wells Fargo cut its forecast by a full percentage point.
“If our interpretation of the recent revisions is correct, real GDP growth for the first quarter could be half the growth rate currently projected by consensus,” said Jay Bryson, chief economist at Wells Fargo in Charlotte, North Carolina.
Still, consumer spending is expected to have grown faster than the 1.0% pedestrian rate recorded 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 supported by a tight labor market, characterized by an unemployment rate of 3.5%.
A separate Labor Department report on Thursday is expected to show that initial jobless claims rose to a seasonally adjusted 248,000 last week from 245,000 the previous week, according to a Reuters poll.
Although claims, which have risen since March, remain well below levels that could worry the labor market, limited access to credit for businesses and households is seen as detrimental to demand and ultimately jobs.
Business investment in equipment is expected to have declined for the second straight quarter. It has been held back by higher borrowing costs, which have reduced demand for goods.
“The impact on GDP may be modest from an accounting perspective, but more important could be the signal investment that overall business behavior is sending, including in terms of labor demand,” said Michael Feroli, chief US economist at JPMorgan in New York.
The housing market likely remained mired in the recession, with residential investment expected to have contracted for the eighth straight quarter. However, the pace of the decline is likely to have slowed compared to the fourth quarter.
Some economists argued that fears of a recession pushed down the prices of commodities like oil, which could help ease cost pressures on businesses and benefit the broader economy. Oil prices have erased all of their gains since the Organization of Petroleum Exporting Countries and allied producers like Russia announced in early April additional production cuts through the end of the year.
“The drop in commodity and energy prices will be enough to keep us from falling into recession,” said Brian Bethune, an economics professor at Boston College. “We’re more likely to hit a soft landing now than we are at the end of 2022. It’s not like we’re falling out of bed here.”
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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