Decelerating GDP Growth Adds to Signals of Growing Recession Risks

U.S. economic output grew at a slower pace in the first quarter, adding to signs that higher interest rates are dragging the economy toward a recession.

Gross domestic product (GDP) grew at an annualized rate of 1.1% in the first quarter of 2023,  the Bureau of Economic Analysis said Thursday. That was a sharp slowdown from the 2.6% rate in the fourth quarter of 2022, and fell short of the 2% median forecast of economists.

The downshift in GDP growth, a broad measure of the total output of the economy, highlights the impact of the Federal Reserve’s campaign of interest rate hikes. The hikes are seemingly  having the intended effect of slowing down the economy in an effort to suppress still-high inflation. 

Other recent indicators, including the Conference Board’s Leading Economic Index, have sounded alarm bells about an impending recession. The risk of a downturn has only grown as banks face pressure to be more cautious about lending amid ongoing turmoil in the financial system. 

“We believe that Q1 will end up being the best quarter for the economy this year,” Oren Klachkin, lead U.S. economist at Oxford Economics, wrote in a commentary. “We expect marginal GDP growth in Q2 and a mild recession in the second half of the year as tighter lending conditions, elevated interest rates, and stubborn price pressures lead consumers and business to pull back on spending.”

Higher borrowing costs, which have driven mortgages out of reach for many would-be homebuyers, have especially hurt the homebuilding industry. Investment in residential real estate as measured by the GDP fell 4.2% in the first quarter on the heels of double-digit plunges in the three previous ones. 

The biggest drag on GDP growth was the change in inventories—how much businesses are stockpiling unsold goods—which signals how much demand they anticipate in the future. Inventories took 2.3% off the annualized growth rate. 

GDP growth stayed in positive territory largely because of consumer spending, which added 2.5% to the headline figure and grew at its fastest rate in a year and a half, though possibly only because of unusually good weather early in the year, economists said. 

While economists remain divided on whether the economy is headed toward an outright recession, or just a soft patch of slower growth, the GDP report pointed to the serious risk of a downturn ahead.

“It would take little to push the economy into recession,” Scott Hoyt, an economist at Moody’s Analytics, wrote in a commentary on the GDP data.