Economic Growth Surprisingly Slowed To 1.6% In First Quarter

High interest rates are dragging the high-flying U.S. economy back toward earth, and still haven’t pushed down inflation to the Fed’s 2% target.  

The U.S. economy as measured by the inflation-adjusted Gross Domestic Product (GDP) grew at an annualized rate of 1.6% in the first quarter, down from 3.4% in the fourth quarter of last year, the Bureau of Economic Analysis said Thursday. That was below the median forecast of 2.2% according to a survey of economists by Dow Jones Newswires and the Wall Street Journal.

And in a setback in the fight against inflation, the report showed consumer prices accelerated, rising to a 3.4% annual rate from 1.8% in the fourth quarter.

The growth downturn is a departure from the recent trend of economic figures showing people spending more, and the economy growing faster than forecasters have expected. Economists have anticipated the Federal Reserve’s campaign of anti-inflation interest rate hikes since March 2022 to significantly slow the economy or even send it into a recession, but it’s proved surprisingly resilient.

The Fed has held its key interest rate at its highest since 2001, pushing up borrowing costs on mortgages, credit cards, and other loans in an attempt to quell inflation that flared up as the economy recovered from the pandemic in 2021.

Consumer spending, the main engine of the U.S. economy, decelerated in the first quarter according to the GDP report, slowing to a 2.5% annual growth rate from 3.3% in the fourth quarter. Decelerating state and local government spending and exports also contributed to the slowdown.