Earlier this year, the US economy grew faster than previously thought.
Gross domestic product (adjusted for inflation) expanded at an annual rate of 2% in the first three months of the year, according to the Commerce Department. said on thursday. This is a significant upward revision from the 1.1% growth rate announced in April. (An earlier revision, published last month, indicated a slightly higher rate of 1.3%.)
A proxy measure of growth based on income rather than production painted a different picture, showing that the economy contracted for two straight quarters. This indicator has also been revised upward from the previous forecast.
The report highlighted the remarkable resilience of the country’s economic recovery despite high inflation, rapid interest rate rises, and relentless forecasts of a recession by many Wall Street forecasters.
Gregory Daco, chief economist at consulting firm EY, formerly known as Ernst & Young, said in a note to clients that the new data caused “genuine optimism.” “This has led many to question whether the long-predicted recession is really inevitable.”
Consumers are driving the recovery through spending, with a 4.2% increase in the first quarter, up from 1% in late 2022 and a faster pace than the 3.7% originally reported in April. . The spending, supported by a strong job market and rising wages, helped offset declines in other sectors of the economy such as business investment and housing.
What It Means: Complexity for the Fed.
The continued strength of the consumer economy poses a challenge to policymakers at the Federal Reserve, which has raised interest rates to curb inflation without triggering a recession.
On the one hand, the first quarter data show some signs of success. Economic growth has slowed, but not stalled, despite a significant drop in inflation since mid-last year.
But many forecasters, both inside and outside central banks, are skeptical that inflation will continue to moderate as long as consumers are willing to open their wallets, suggesting policymakers will take further steps to curb growth. It means that there is a high possibility of taking Fed officials held rates unchanged at a meeting this month for the first time in more than a year, but signaled they were likely to resume raising rates in July.
Fed Chairman Jerome H. Powell said at a meeting in Madrid on Thursday that inflation has repeatedly betrayed expectations of a slowdown.
“We’ve all seen time and time again that inflation has been shown to be more persistent and stronger than expected,” he said.
What’s next: Data about income and expenses.
Powell and others will get more up-to-date evidence on their progress with the Commerce Department’s release of data on personal income, spending and inflation from May on Friday.
Gina Smirek Contributed to the report.