GDP Report: US Economy Grows at 1.1% in Q1

Higher interest rates hit the U.S. economy in early 2023, but free-spending consumers seem to be keeping the slack at bay, at least for now.

Gross domestic product, adjusted for inflation, rose at an annualized rate of 1.1 percent in the first quarter. Department of Commerce said Thursday. That was down from a 2.6 percent rate in the final three months of 2022, though it represented a third straight quarter of growth after output contracted in the first half of last year.

Figures are preliminary and will be revised at least twice as complete data becomes available.

Growth in the first quarter was dragged down by weakness in housing and business investment, both of which are heavily influenced by interest rates. The Federal Reserve has raised rates by nearly five percentage points since the start of last year in an effort to curb inflation.

However, consumers have proven resilient in the face of both rising prices and higher borrowing costs. Inflation-adjusted spending rose at an annual rate of 3.7 percent in the first quarter, up from 1 percent in the previous period. Consumers have been buoyed by a strong job market and rising wages, which have helped offset higher prices.

However, spending eased in the quarter, and forecasters warn it could weaken further amid fears of layoffs, bank failures and a possible recession.

“Consumer spending is still rising, but I don’t know how long that will last,” said Ben Herson, economist at S&P Global Market Intelligence. “Confidence is weak and getting weaker. You have to wonder, will that soon become a drag on spending?”

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A gradual slowdown will be welcomed by central bank policymakers trying to cool the economy enough to reduce inflation, but it could lead to widespread layoffs and unemployment.

“It’s not a free fall,” said Dana Peterson, chief economist at the Conference Board, a trade group. “It’s a controlled descent, and the Fed is trying to achieve that with higher interest rates.”

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