“The economy is in a very unsettling, dicey situation,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “All forward-looking measures are pointing to significant slowing.”
Three years after the 2020 coronavirus recession — the steepest and shortest on record — the U.S. economy remains resilient but shaky. Businesses are hiring, people are getting raises, and families are continuing to spend.
But retail sales have fallen for two months in a row, manufacturing output is slumping, and bank lending remains depressed. Meanwhile, major companies such as 3M and Gap are laying off thousands, and concerns of a banking crisis have re-emerged this week, after shares of First Republic Bank lost half their value in one day. And policymakers are still grappling with inflation, which has eased considerably from 40-year highs, but is still above historic norms.
The tepid gross domestic product figures released Thursday — which came in significantly lower than the 1.9 percent of annual growth analysts expected — has only added to the gloom. The data will inform policymakers as they consider the cumulative effect of a year of rapid interest rate hikes, as well as the debt-ceiling battle roiling Washington. A failure to reach a deal between President Biden and congressional Republicans in the coming months could send global financial markets into a tailspin and further strain the economy.
Even so, Biden applauded the recent growth and said his administration’s investments in manufacturing and supply chains had helped create a record 12.5 million jobs over the past two years.
“Today, we learned that the American economy remains strong, as it transitions to steady and stable growth,” he said in a statement Thursday. “American consumers continued to spend, even as the overall pace of growth moderated.”
But weaknesses continue to emerge. The Federal Reserve’s aggressive fight against inflation is hampering large parts of the economy, including housing and manufacturing. The job market and consumer spending, while robust, are slowing. And there are growing fears that a pullback in banks’ willingness to lend could freeze business investments and job creation. Many economists are predicting a recession later this year.
“We are seeing growing cracks in the economic foundation,” said Lydia Boussour, a senior economist at EY-Parthenon who expects a mild downturn in the coming months. “Consumer spending has been quite strong, but the report is backward-looking and overstates some of the strength of the consumers and the overall economy. We know the economy lost momentum as the quarter progressed, which sets the stage for weaker growth.”
Consumer spending, which makes up about 70 percent of the economy, helped lift the latest gross domestic product reading. Government spending at the local, state and federal levels, and exports also contributed to growth.
But there were also significant drags on the economy, as businesses scaled back on inventory, as well as investments in machinery, equipment and supplies. A weak housing market and imports from other countries, particularly appliances and cars, also chipped away at GDP, which measures goods and services produced in the United States.
Although consumers have so far been spending handsomely, particularly on dining out, travel and other services, there are signs that many could begin pulling back. Credit card debt is beginning to pile up, and many Americans have worked their way through pandemic-related stimulus funds and other savings. That, combined with the pinch of inflation, is likely to put a damper on spending plans later this year. Overall, prices are 4.9 percent higher than they were a year ago.
“The consumer ended the quarter on a sour note, calling into question the sustainability of economic growth moving forward,” John Leer, chief economist at Morning Consult, wrote in a note to clients Thursday. “Without a robust consumer, we’re likely to see more volatility and uncertainty.”
Still, the economy has remained surprisingly hardy in recent months. Employment growth is off its breathless post-pandemic reopening pace, but it is still incredibly robust, with monthly job growth averaging 345,000 in the first three months of the year. The unemployment rate, at 3.5 percent, is near 50-year lows.
The tight job market is especially notable given the Fed’s sharp interest rate increases, which are aimed at slowing consumer demand in part by raising unemployment. Strong employment has also buffeted growth, at least so far, from the drag of a recent banking crisis spurred by the collapse of Silicon Valley Bank in March.
“Four months in, this year has already been a roller coaster,” said Claudia Sahm, an economist who served on the Council of Economic Advisers during the Obama administration. “We went from ‘Things are looking good’ at the beginning of 2023, to ‘Banks are collapsing, the bottom is falling out.’ And now we’re back to trying to figure out what’s going to happen. Where are we now? We don’t know.”
The Fed, which has raised interest rates nine times in the past year, is expected to do so again next week in hopes of slowing the economy enough to bring down interest rates. But there are also fears that activity could slow too much, leading to job losses and recession.
That uncertainty is weighing on business owners and consumers alike. At Glass Slipper Concierge, a travel agency that specializes in Disney vacations, families are pulling back on summer and fall travel, after months of splurging.
“Things are definitely slowing down,” said Jennifer Kozlow, a senior adviser at the Orlando-area company. “Last year we felt like we were drinking from a fire hose. But this year, travel is expensive, and people are more worried about the economy. They’re saying ‘If I’m going to skip something, maybe I’ll skip the family trip to Disney.’”
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