America’s economic growth for the first quarter was stronger than predicted at the start of 2023. This could help the argument for higher interest rates in the US, the world's largest economy.
The Commerce Department said recent data indicated the US economy went up by 2% in the first quarter of the year. An initial estimate placed it at 1.3% from January to March. It’s also well above the 1.4% that many economists expected.
The department’s final estimate of the first-quarter GDP showed an upward revision. This was reportedly geared towards exports and consumer spending. It was also helped by state and local government spending. There were also investments coming in from housing businesses.
The upswing indicated consumer spending was stronger than what was reportedly understood before. The recent data revealed Americans spent more money on services. There was a jump in money spent on healthcare services.
Consumers were not as keen on spending on goods though. Consumer spending often accounts for around two-thirds of economic output. Its percentage was then changed to 4.2% from 3.8%. The newest estimate included data from the department’s Quarterly Services Survey.
The US Federal Reserve has been working to slow down the economy. It’s pushing to ease the pressures forcing prices up.
America’s central bank raised interest rates by over 5% since March of the previous year. It has also indicated that consumers should expect more rate hikes in the future. This has led to worries that the increased rates could result in a painful slowdown of the economy. After all, higher interest rates have a big impact on consumer spending. It also affects business expansions.
Many companies even reported concerns about the economy’s outlook at the start of the year. Despite their fears, job hiring has been robust. Various data also painted an optimistic future for the country.
The Commerce Department also had positive news aside from that on consumer spending. The agency said that exports were also better than what was earlier reported.
KPMG chief economist Diane Swank agreed with the report. She tweeted that the narrative on growth shifted again. She added that “signs of slowing scant."
Analysts pointed out the report didn’t change the general view of inflation though. The Labor Department revealed that consumer prices went up by 4% over the past year to May. It was the slowest move in two years. It mirrored the lowered fuel costs since the previous year's spike.
The prices of many goods are still rising. Core inflation was reportedly at 5.3%. This type of inflation divests food items and energy consumption. Economists use it to have a realistic gauge of fundamental pressures.
Policymakers at the Federal Reserve must keep a close eye on core PCE prices. The Fed is also working on wrangling inflation back down to 2%. It has instigated a series of rate increases to do this. The rate hikes are all aimed at slowing down the economy. It’s a challenging task. Especially when you consider the summer of 2022 saw inflation hit the highest level. It was the highest since the 80s.
Federal Reserve chief Jerome Powell stated he doesn’t think the current policy is enough. He made the observation during a panel discussion in Portugal. The event was then hosted by the European Central Bank.
Powell admitted that the policy is restrictive but not enough to fight inflation. He said it might need to be more restrictive. It might also not be in place long enough.
Scott Hoyt of Moody's Analytics said he anticipated some struggles with the economy. Especially with the Fed zeroing in on inflation. He noted that they still managed to prevent an outright decline in the economy. Moody’s senior director said the economy is still resilient. He added the country shouldn’t relax on its laurels yet. Even though the chance of a recession happening is lower.
The cautious tone does temper some recent positive news on the job front. Reports revealed that new joblessness benefit claims went down the previous week. It was the biggest drop in 20 months. Reports also showed that May had better-than-expected employment growth. There were also gains made in retail and housing.
The strong standing of the labor market will continue to boost US economic growth. This is in line with the increase in wages. But this will keep fueling inflation. It could result in the Federal Reserve once again raising rates in July.
Hoyt predicted the economy would struggle in response to this. It will slow down growth. When this happens, it could bring inflation down inflation without causing a recession.
Even the slow growth is better than the malaise China’s economy is experiencing at the moment. The Asian powerhouse’s economy continues to flounder. Its factory activity has contracted for three consecutive months now.
Policymakers are feeling more pressure to bolster the country’s growth. China is always touted as having the world's second-largest economy. But it’s flatlining now after a strong first quarter showing post-COVID.
One economist said June’s PMI highlighted many weaknesses and imbalances. Economist Bruce Pang of Jones Lang LaSalle listed several examples. He mentioned the continuous slowdown of external and internal demand. Small enterprises are also slowing down operations. There’s also more pressure on the private economy.
Pang said this shows the country needs a more robust package of policy initiatives. These will help make sure the country meets its annual growth targets.
China’s government has set a 5% GDP growth target for 2023.