U.S. GDP rose at a 1.1% pace in the first quarter as signs build that the economy is slowing

Growth in the US slowed significantly during the first three months of the year as interest rate increases and inflation took hold of an economy that was expected to shrink further.

The Commerce Department reported on Thursday that gross domestic product, a measure of all goods and services produced for the period, grew at a 1.1% annual pace in the first quarter. Economists polled by Dow Jones were expecting a rise of 2%.

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The growth rate followed a fourth quarter in which GDP grew 2.6%, part of a year that saw growth of 2.1%.

The report also showed that the personal consumption expenditure price index, an inflation measure that the Federal Reserve closely follows, rose to 4.2% ahead of the 3.7% estimate. High inflation and slow growth, sometimes described as “stagflation”, characterized the US economy in the late 1970s and early 80s.

Stocks initially reacted little to the report, with major indexes pointing to a higher open. Treasury yields rose.

The slowdown in growth has been attributed to a decline in private inventory investment and a decline in non-residential fixed investment, the report said. The inventory slump reduced the headline number by 2.26 percentage points.

Consumer spending as measured by personal consumption expenditure increased by 3.7% and exports increased by 4.8%. Gross private domestic investment fell 12.5%.

“The US economy is at an inflection point as consumer spending softened in recent months,” said Jeffrey Roach, chief economist at LPL Financial. “The backward-looking nature of the GDP report is potentially misleading to markets as we know consumers were still spending in January but, since March, have pulled back as consumers are becoming more pessimistic about the future.”

The report comes as the Federal Reserve is seeking to slow down an economy burdened by inflation running at its highest level in more than 40 years.

In a policy tightening set to begin in March 2022, the central bank has raised its benchmark interest rate by 4.75 percentage points, taking it to the highest level in nearly 16 years. Although inflation has pulled back somewhat from its June 2022 peak of 9%, it remains well above the Fed’s 2% target. All policy makers say that inflation is still too high and will require higher interest rates.

At the same time, growth has been hit by problems in the banking sector that are likely to impact the economy going forward. Those two issues — the Fed’s rate hike cycle and an expected credit crunch — are expected to tilt the economy into recession later this year.

Consumers, however, remain resilient and are expected to use additional savings and purchasing power to make the economic contraction smaller and shallower. A strong job market with an unemployment rate of 3.5% is also expected to support growth.

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