The US economy grew at a sluggish 1.6% in the first quarter

The U.S. economy continued to grow, but at a sharply slower rate earlier this year, as strong consumer spending was offset by weakness in other sectors.

Adjusted for inflation, gross domestic product grew at an annual rate of 1.6 percent in the three months to 2024, down from 3.4 percent at the end of 2023, the Commerce Department said Thursday.

Taken on its own, the slowdown in growth is not worrisome, especially as the Federal Reserve tries to cool the economy. And the weak first-quarter numbers were driven by big swings in commercial inventories and international trade, which often fluctuate wildly from one quarter to the next. Basic growth measures were strong.

However, the slowdown has come at the same time as the central bank's fight against inflation has stalled: prices rose faster in the first quarter than at the end of last year. This raises the uncomfortable possibility that high interest rates are having an impact on economic activity but are not succeeding in fully controlling inflation.

For now, consumers are ensuring growth continues. Spending rose 2.5 percent in the first quarter as lower unemployment and rising wages helped shoppers offset higher interest rates and rising prices.

“Sentiment is not that strong – people don't see the economy in good shape – but personally they are going out and spending,” said Brian Rose, senior economist at UBS. “They seem to defy gravity.”

However, if consumers return to Earth, the broader economy could suffer. Businesses invested less in new facilities in the first quarter, and they reduced inventories — a sign they are cautious despite strong sales.

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“The consumer is still king – it's driving the growth story – yet businesses are very reluctant to invest,” said James Knightley, chief international economist at ING. “If something happens to the consumer, the growth story will unravel very quickly.”

Spending has been driven particularly by wealthy consumers, whose low debt and fixed-rate mortgages have insulated them from the effects of higher interest rates, and who have benefited from a stock market that has recently set records.

Low-income households, however, are showing growing signs of crisis. They are increasingly turning to credit cards to meet their expenses, and with interest rates high, more of them are falling behind on payments.

“There's a sense now that lower-income families are increasingly stretched,” said Andrew Husby, senior US economist at BNP Paribas. “You're seeing a split in the US economy.”

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