US economy grew by just 1.6%

By Bryan Mena, CNN

Washington (CNN) — The US economy cooled more than expected in the first quarter of the year, but remained healthy by historical standards. Economic growth has slowed steadily over the past 12 months, which bodes well for lower interest rates, but the Federal Reserve has made it clear it’s in no rush to cut rates.

Gross domestic product, which measures all the services and goods produced in the economy, measured an annualized rate of 1.6% in the first quarter, the Commerce Department reported Thursday. It was the weakest pace of growth since the second quarter of 2022 when the economy contracted.

That’s a steep slowdown from the fourth quarter’s 3.4% rate and also below the 2.2% rate economists projected, according to a FactSet poll. The figures are adjusted for seasonal swings and inflation.

A sharp increase in imports, which subtracts from GDP, contributed to the slowdown in growth from the fourth quarter, shaving off nearly an entire percentage point. Spending on imports jumped to a 7.2% rate from 2.2% in the fourth quarter. A decrease in inventory investment in the private sector also weighed on the economy earlier this year.

Consumer spending, which accounts for the lion’s share of economic output, also slowed slightly earlier this year, but it still fueled growth in the first quarter.

What this means for interest rates

Inflation slowed considerably last year, but the pace of its descent has stalled in recent months. That’s the main reason why the Fed isn’t planning to cut interest rates imminently, but the economy’s resilience is also reassuring central bankers that they can afford to sit still and wait for inflation to budge lower. Fed officials will begin to cut rates once they’re convinced that inflation is under control and is on track to their 2% target — but they could also reduce rates sooner than expected if the economy suddenly falters.

For now, economic growth remains healthy, despite the weaker-than-expected first-quarter GDP reading, as employers continue to hire at a solid clip and workers still command robust wage gains. Economists and Fed policymakers are still widely expecting that momentum to slow this year, with interest rates perched at a two-decade high, but a recession this year isn’t in the cards.

“Consumers are becoming a bit more selective with what they purchase and how much of it because of the high interest-rate environment and because inflation remains high,” Oren Klachkin, financial market economist at Nationwide, told CNN. “But as long as the job market remains solid, they will continue to spend. That is more than compensating for the fact that there’s continued pressure from the inflation front and interest rates.”

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