American economic growth slowed to a 1.1% annualized rate in the first quarter of 2023, marking a significant slowdown from previous quarters as various headwinds continue to slow recovery from the lockdown-induced recession.
The rise in real gross domestic product reflected increases in consumer spending, exports, nonresidential investment, and government spending, according to an advance estimate released on Thursday by the Bureau of Economic Analysis. Growth was offset by decreases in private inventory investment and residential investment, as well as imports, which are subtractions in the calculation of gross domestic product.
The 1.1% growth rate in the first quarter of 2023 marks a decline from the 2.6% growth rate in the fourth quarter of 2022, as well as the 3.2% growth rate in the third quarter of 2022.
The economic data comes as inflationary pressures, largely induced by the supply chain bottlenecks and labor shortages which continue to follow the lockdown-induced recession, raise expenses, and diminish purchasing power for American consumers and businesses. Inflation reached 5.0% last month, according to data from the Bureau of Labor Statistics, marking relative relief from the 9.1% rate witnessed last summer even as prices for many items remain elevated and wage increases fail to keep pace with price levels.
The reprieve in headline inflation coincided with greater real disposable personal income, the amount households have left to spend or save after taxes: the metric increased 8.0% in the first quarter of 2023 relative to a 5.0% increase in the fourth quarter of 2022. The personal saving rate, the portion of disposable income saved by households, meanwhile increased 4.8% in the first quarter of 2023, an increase from the 4.0% increase in the fourth quarter of 2022.
Economic actors were also concerned in the first quarter by the sudden failure of Silicon Valley Bank and Signature Bank. The implosion of the financial institutions, where the vast majority of account balances exceeded the $250,000 deposit threshold backed by the Federal Deposit Insurance Corporation, prompted financial regulators to secure both insured and uninsured accounts to prevent additional bank runs.
Officials at the Federal Reserve concluded in a meeting last month that the turmoil in the financial system warrants a recession forecast for the end of the year, followed by a recovery over the subsequent two years, according to minutes released by the Federal Open Market Committee and the Federal Reserve Board of Governors.
“If banking and financial conditions and their effects on macroeconomic conditions were to deteriorate more than assumed in the baseline, then the risks around the baseline would be skewed to the downside for both economic activity and inflation,” the officials said, “because historical recessions related to financial market problems tend to be more severe and persistent than average recessions.”
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Monetary policymakers have also worked to increase the target federal funds rate over the past year, thereby combatting inflationary pressures while dampening economic activity as consumers and businesses see the cost of borrowing money increase. Assets in the overall banking system are presently $2 trillion lower than their book value due to the elevated interest rates, according to a recent study from analysts at the National Bureau of Economic Research, prompting additional worries about the sector’s stability.