June 3, 2023

The world’s largest economy slowed sharply in the first quarter of the year, the first official estimate has raised fears of a coming recession.

Growth was measured at an annual rate of 1.1% between January and March, the Commerce Department said.

Economists had expected a figure of 2%.

The slump followed growth of 2.6%, by the same measure, during the last three months of 2023.

The growth was mainly explained by consumer spending holding up, probably due to a low unemployment rate, as the aggressive pace of interest rate hikes to curb inflation hit other areas, such as the housing market, harder.

The data also pointed to a large decline in corporate inventories — behavior typically seen in anticipation of an economic downturn.

Economists are divided on the prospect of an announced recession.

The definition of a technical recession in most of the world is two consecutive quarters of negative growth.

Marriner S. Eccles Federal Reserve Board Building in Washington
The Federal Reserve has raised its key interest rate to a range of 4.75%-5% and is expected to rise again next month

By that measure, the US economy would be in recession in the first half of last year.

But the country defines such a contraction differently. It is determined by a committee of experts.

The US economy’s low unemployment rate largely prevented a recession being declared last year, but conditions for 2023 continue to darken.

Many economists say the cumulative impact of the Fed’s rate hikes is not yet fully felt, while the rate of hiring is slowing.

Many banks, charging higher interest rates as a result, have also muddied the waters following a tightening of lending standards since the bankruptcy last month of two major banks – Silicon Valley Bank and Signature Bank.

There are signs that the crisis of confidence isn’t over yet, as First Republic, a major regional lender, has seen another run on its share price this week, sending it to new lows.

It was effectively rescued last month by a $30 billion cash injection from 11 major industry peers and revealed on Tuesday that $100 billion had been withdrawn by depositors during the frenzy to grip the industry.

It has been reported that the federal government is unwilling to carry out a bailout.

For a more accessible video player, use the Chrome browser

March: ‘Our banking system is safe’

Another political challenge is also gaining ground.

The Republican-dominated House of Representatives has been trying to pressure President Biden over a looming debt ceiling deadline by voting to raise the limit only in exchange for hefty spending cuts.

Bankruptcy would plunge the US economy into chaos, forcing Biden to negotiate with his political opponents.

Brian Klimke, director of investment at Cetera Investment Management, said of the economic growth numbers: “January was really the best month and since then we’ve seen weakness in February and March, which really drags the economy down slowly.

“Looking to the future, the data seems to continue to weaken.

“The good news is that we think a recession can be mild.”