Will The Economy’s Hot Streak Continue? What To Expect From Thursday’s GDP Report

The U.S. economy has defied expectations that it would slow down under the weight of high interest rates, and Thursday’s government report on gross domestic product will show whether it’s continuing to defy gravity.

The real GDP—an inflation-adjusted measure of the country’s economic output compiled by the Bureau of Economic Analysis—is expected to have grown at an annual rate of 2.2% in the first quarter, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. That would be a slowdown from the 3.4% growth rate in the fourth quarter and below the 2.4% average annual rate in the 10 years leading up to the pandemic. 

The Federal Reserve Bank of Atlanta’s GDP Now tracker, which projects the growth rate based on data as it comes in, predicts a 2.9% pace. 

Strength of Economy Continues to Surprise

In recent months, economists have anticipated the economy would slow down, only for it to keep roaring ahead, powered by devil-may-care spending by consumers. Although the Federal Reserve’s anti-inflation rate hikes have pushed up borrowing costs on all kinds of loans, people have found ways to keep shopping anyway. 

Continued rapid consumer spending likely helped boost the GDP at the outset of the year, economists said. Elevated government spending on infrastructure and other programs has also helped juice economic growth, although at the cost of adding to the national debt. Accelerated homebuilding and exports also likely contributed, outweighing a decrease in business inventory investment. 

“Q1 GDP will likely underline the continued resilience of the US economy,” Michael Pearce, deputy chief U.S. economist at Oxford Economics, wrote in a commentary. “Our GDP tracker shows the contours of Q1 GDP growth have been firmly established for some time—the consumer remains the main engine of the economy, and they were joined by a continued solid pace of government spending last quarter, together with a modest positive contribution from net trade.”

Data Will Factor Into Fed’s Thinking on Interest Rates

While a hot economy and resilient consumers are encouraging for business, good news may be bad news for financial markets. Rapid economic growth could discourage officials at the Federal Reserve from cutting the benchmark fed funds rate from its current 23-year high. Prospective homebuyers and other borrowers have been eager for interest rates to fall and put downward pressure on rates for mortgages and other loans.

However, Fed policymakers are in the midst of a balancing act, attempting to use high interest rates to cool the economy and inflation, but not so much that it causes a recession. A booming economy could prompt the Fed to keep rates higher for longer, especially since inflation remained surprisingly stubborn in the first three months of the year.