Biden cops blame as prices rise and US economy slows
The US economy slowed sharply last quarter to a 1.6 per cent annual pace in the face of high interest rates, but consumers — the main driver of economic growth — kept spending at a solid pace.
Yesterday’s report from the Commerce Department said the gross domestic product — the economy’s total output of goods and services — decelerated in the January-March quarter from brisk 3.4 per cent growth rate in the final three months of 2023.
A surge in imports, which are subtracted from GDP, reduced firstquarter growth by nearly 1 percentage point. Growth was also held back by businesses reducing their inventories.
By contrast, the core components of the economy still appear sturdy. Along with households, businesses helped drive the economy last quarter with a strong pace of investment.
The import and inventory numbers can be volatile, so “there is still a lot of positive underlying momentum”, said Paul Ashworth, chief North America economist at Capital Economics.
The economy, though, is creating price pressures, a continuing source of concern for the Federal Reserve.
A measure of inflation in Friday’s report accelerated to a 3.4 per cent annual rate from January through March, up from 1.8 per cent in the last three months of 2023 and the biggest increase in a year. Excluding volatile food and energy prices, socalled core inflation rose at a 3.7 per cent rate, up from 2 per cent in fourth-quarter 2023.
From January through March, consumer spending rose at a 2.5 per cent annual rate, a solid pace though down from a rate of more than 3 per cent in each of the previous two quarters. Americans’ spending on services — from movie tickets and restaurant meals to airline fares and doctors’ visits — rose 4 per cent, the fastest such pace since mid-2021.
But they cut back on goods such as appliances and furniture. Spending on that category fell 0.1 per cent, the first such drop since the summer of 2022.
Gregory Daco, chief economist at tax and consulting firm EY, noted that the underlying economy looks solid, though it’s slowing from last year’s unexpectedly fast pace. The rise in imports that accounted for much of the drop in first-quarter growth, he noted, is “a sign of solid demand” by American consumers for foreign goods.
Still, Daco said that the economy’s “momentum is cooling”.
“It’s unlikely to be a major retrenchment,” he said, “but we are likely to see cooler economic momentum as a result of consumers exercising more scrutiny with their outlays.”
The state of the economy has seized Americans’ attention as the election season has intensified. Although inflation has slowed sharply from a peak of 9.1 per cent in 2022, prices remain well above their pre-pandemic levels.
Republican critics of President Joe Biden have sought to pin responsibility for high prices on Biden and use it as a cudgel to derail his reelection bid. And polls show that despite the healthy job market, a near-record-high stock market and the sharp pullback in inflation, many Americans blame Biden for high prices.
Last quarter’s GDP snapped a streak of six straight quarters of at least 2 per cent annual growth. The 1.6 per cent rate of expansion was also the slowest since the economy actually shrank in the first and second quarters of 2022.
The economy’s gradual slowdown reflects, in large part, the much higher borrowing rates for home and auto loans, credit cards and many business loans that have resulted from the 11 interest rate hikes the Fed imposed in its drive to tame inflation.