The US economy likely grew at a slower pace in the first quarter of 2023, according to estimates from the Commerce Department. The annualized growth rate is forecasted to be 2.4%, down from 3.4% in the fourth quarter of 2022. Despite the slowdown, growth is still expected to remain above the Fed’s non-inflationary rate of 1.8%.
Inflation also accelerated in the first quarter, with the core PCE price index, excluding food and energy, rising by an estimated 3.4%. This increase is higher than the 2.0% pace seen in the fourth quarter, but economists do not anticipate a significant resurgence in price pressures.
Consumer spending remained the primary driver of economic growth in the first quarter, supported by a resilient labor market and pent-up demand. Job gains averaged 276,000 per month in the first quarter, up from 212,000 in the October-December quarter. This has led to sustained wage growth and higher consumer spending, which accounts for more than two-thirds of economic activity.
The housing market also contributed to economic growth, with double-digit growth anticipated in residential investment. A severe shortage of previously owned homes for sale has encouraged the construction and sale of new single-family homes. Business spending on intellectual property also provided a boost as companies invest in artificial intelligence.
However, some economists express concerns about the sustainability of consumer spending, particularly among lower-income households who have depleted their pandemic savings and are relying on debt to fund purchases. Additionally, sentiment surveys have recently indicated a potential slowdown in growth later in the year.
Despite these concerns, other economists caution against reading too much into the divergence between hard economic data and sentiment surveys, arguing that the pandemic has made it difficult to get a clear signal from the surveys. They also point out that businesses tend to be conservative by nature and may be underestimating the strength of the economy.
Overall, the US economy continues to grow at a solid pace, but the pace of growth has moderated, and inflation has accelerated. The Fed is expected to continue raising interest rates to combat inflation and is likely to delay cutting rates until September.
