April 27, 2023
3 mins read

Economic growth likely slowed in Jan-March quarter

The Federal Reserve, in its fight against an inflation rate that last year hit a four-decade high, has raised its benchmark rate nine times in just over a year…reports Asian Lite News

Despite surging interest rates, punishing inflation and global turbulence, the U.S. economy stood firm last year. From employers to consumers, the picture was one of surprising resilience.

This year may be shaping up as a more downbeat story. The economy is widely expected to decelerate steadily and to slip into a recession sometime this year.

Some early such signs could begin to emerge Thursday, when the Commerce Department will issue its first estimate of the economy’s performance in the first three months of 2023.

Forecasters have predicted that the gross domestic product — the broadest measure of economic output — grew at a 1.9% annual rate from January through March, according to a survey by the data firm FactSet. That would mark a significant slowdown from the 3.2% growth rate from July through September and the 2.6% rate from October through December.

The obstacles the economy faces are growing more troublesome. The biggest among them is the dramatically higher cost of borrowing. The Federal Reserve, in its fight against an inflation rate that last year hit a four-decade high, has raised its benchmark rate nine times in just over a year.

As those higher rates spread through the economy, it is becoming steadily more expensive for consumers and businesses to borrow and spend. The cost of a loan to buy a house or a car or to expand a business can become prohibitively expensive.

Many economists say the cumulative impact of the Fed’s rate hikes has yet to be fully felt. Yet the central bank’s policymakers are aiming for a so-called soft landing: Cooling growth enough to curb inflation yet not so much as to send the world’s largest economy tumbling into a recession.

There is widespread skepticism that the Fed will succeed. An economic model used by the Conference Board, a business research group, puts the probability of a U.S. recession over the next year at 99%.

The Conference Board’s recession-probability gauge had hung around zero from September 2020, as the economy rebounded explosively from the COVID-19 recession, until March 2022, when the Fed started raising rates to fight inflation.

Already, higher rates have clobbered the housing market, which depends on the ability of buyers to take out long-term mortgages. Investment in housing plummeted at an annual rate of 27% from July through September and 25% from October through December.

Consumers, whose spending accounts for roughly 70% of U.S. economic output, seem to be starting to feel the chill. Retail sales had enjoyed a strong start in January, aided by warmer-than-expected weather and bigger Social Security checks. But in February and again in March, retail sales tumbled.

“The U.S. economy is unwell, and it’s starting to show,” said Gregory Daco, chief economist at the consulting firm EY.

Tumult in the banking sector — the United States endured its second- and third-biggest bank failures ever last month — poses another threat. After depositors yanked money out of troubled Silicon Valley Bank and Signature Bank, forcing regulators to shut them down, many banks are cutting back on lending to conserve money to handle potential bank runs.

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