The real estate market is slowing down. Companies are pulling back on hiring and investing. But American consumers are keeping the economy from entering a recession, at least for now.
Gross domestic product, adjusted for inflation, increased at an annual rate of 1.1 percent in the first quarter, according to preliminary data published by the Department of Commerce Thursday. That was down from a 2.6 percent rate in the last three months of 2022, but nonetheless a third straight quarter of growth after output declined in the first half of last year.
The Federal Reserve’s efforts to cool the economy are having an effect. The housing sector contracted for the eighth consecutive quarter and business investment in equipment fell for the second consecutive quarter. Both areas are heavily influenced by interest rates, which the authorities raised repeatedly over the past year to control inflation.
But those declines were more than offset by robust consumer spending, which rose at an annual rate of 3.7 percent, the fastest growth since mid-2021, when the launch of the Covid-19 vaccine spurred the economy. Consumers have been buoyed by a strong job market and rising wages, helping them weather the combination of rising prices and higher borrowing costs.
“You never want to bet against the American consumer, that’s what you learn over and over again,” said Stephen Juneau, Bank of America economist.
Spending on services, such as travel and restaurant meals, continued to recover from pandemic lows, and spending on goods also rose after four straight quarters of declines.
However, it is not clear how long that resilience can continue. Spending slowed as the quarter progressed, and forecasters said it could weaken further amid headlines about layoffs, bank failures and warnings of a possible recession. Savings rates have been rising, a sign that consumers may be increasingly cautious, and more Americans are falling behind on debt payments, suggesting they may be struggling to keep up with rising costs. prices.
“Consumer spending continues to rise, but I don’t know how long that may last,” said Ben Herzon, an economist at S&P Global Market Intelligence. “Trust is weak and has been weakening. You have to ask yourself, will that soon translate into a reversal in spending?”
Many companies seem to think so. The companies did not add to inventories in the first quarter, an indication that they expect sales to slow in the coming months and do not want to be stuck with products they cannot sell.
“Consumption is still strong, and yet companies seem to think they don’t need to replenish inventories because, presumably, they think consumption will weaken,” said Megan Greene, chief economist at the Kroll Institute. “So who’s right?”
At Nexgrill, a California-based seller of grills and other outdoor cooking equipment, sales of lower-end models — those under $500 — have been strong so far this year, said Ramsay Hawfield, vice president of the company. But sales of higher-priced products have started to slow in recent months, which Hawfield interprets as some consumers watching their budgets more closely.
“They don’t feel as rich as a year or two ago, and now they feel a little tight and a little nervous,” he said. “The person who was buying that $500 or $600 grill says, ‘Maybe I’ll go with that $300 or $400 version.’”
Nexgrill is not laying off any workers, Hawfield said, and is still investing in new products. But it’s doing so carefully, avoiding features that consumers might not find worth the extra cost. Retailers, he added, are putting pressure on Nexgrill and other brands to keep prices low, something that was much less true a year ago, when consumers hardly seemed to look at price tags.
“They’re putting pressure on us to say ‘Let’s find a better price,’” he said.
Lawmakers would welcome a gradual pullback from consumers, who worry that continued free spending is fueling inflation. Consumer prices rose at an annual rate of 4.2 percent in the first quarter, according to data released Thursday, faster than late last year and well above the Fed’s 2 percent target. Fed officials will meet next week in Washington and are expected to hike rates for the 10th consecutive meeting.
Policymakers will get a more up-to-date read on the economy on Friday, when the Commerce Department releases revenue and spending data for March and the Labor Department releases data showing whether wage growth continued to slow in the first quarter. , a key fact. Fed target.
What happens next may depend on the job market. Two years of high inflation and robust spending have eaten into the savings reserve that many households amassed early in the pandemic. But as long as companies keep hiring and wages keep rising, Americans will be able to keep spending. After-tax income increased at an annual rate of 8 percent in the first quarter, adjusted for inflation, although the big jump was partly due to a cost-of-living adjustment that led to an increase in Social Security payments in January.
But if companies start laying off workers, consumers’ willingness to continue spending could quickly evaporate, said Dana Peterson, chief economist at the Conference Board, a business group. That would almost certainly push the economy into a recession.
“If you’re a consumer and you think you might lose your job, then you’re going to change your spending habits, and that’s what’s going to be a drag,” he said.
Jobless claims have risen in recent months, though they fell last week, and companies have posted fewer job openings. So far, though, “it’s not a free fall,” Peterson said. “It’s a controlled decline, and that’s what the Fed is trying to achieve with higher interest rates.”
Still, the data released Thursday mostly predates the Silicon Valley Bank collapse and the financial turmoil that followed. And there are more threats on the horizon, including an imminent debt ceiling showdown that could further destabilize financial markets. Early forecasts suggest that GDP growth is likely to slow further in the second quarter, and many analysts believe a recession is likely later this year.
“If we have a shock, if we have a debt ceiling meltdown or something like that, that increases the probability in my mind that we’re going into a recession,” said Jay Bryson, chief economist at Wells Fargo.