The housing market is slowing. Businesses are pulling back on hiring and investment. But American consumers are keeping the economy out of a recession — at least for now.
Gross domestic product, adjusted for inflation, rose at a 1.1 percent annual rate in the first quarter, according to preliminary data released by the Commerce Department on Thursday. That was down from a 2.6 percent rate in the last three months of 2022 but nonetheless a third straight quarter of growth after output declined in the first half of last year.
The Federal Reserve’s efforts to cool off the economy are having an effect. The housing sector shrank for the eighth consecutive quarter, and business investment in equipment fell for the second quarter in a row. Both areas are heavily influenced by interest rates, which policymakers have raised repeatedly over the past year to tamp down inflation.
But those declines were more than offset by robust spending by consumers, which rose at an annual rate of 3.7 percent, the fastest growth since mid-2021, when the Covid-19 vaccine rollout lifted the economy. Consumers have been buoyed by a strong job market and rising wages, which have helped them weather the combination of rising prices and higher borrowing costs.
“You never want to bet against the U.S. consumer is what you learn over and over again,” said Stephen Juneau, an economist at Bank of America.
Spending on services such as travel and restaurant meals continued to rebound from pandemic lows, and spending on goods also rose after four straight quarters of declines.
It isn’t clear how long that resilience can continue, however. Spending slowed as the quarter progressed, and forecasters said it could weaken further amid headlines about layoffs, bank failures and warnings of a possible recession. Savings rates have been edging higher, a sign that consumers may be growing more cautious, and more Americans are falling behind on debt payments, suggesting that they may be struggling to keep up with rising prices.
“Consumer spending is still moving up, but I don’t know how long that can last,” said Ben Herzon, an economist at S&P Global Market Intelligence. “Confidence is weak and has been weakening. You’ve got to wonder, will that soon translate into a pullback in spending?”
Many businesses seem to think so. Companies didn’t add to inventories in the first quarter, an indication that they expect sales to slow in the months ahead and don’t want to be stuck with products they can’t sell.
“Consumption is still strong, and yet businesses seem to think that they don’t need to restock inventories because presumably they think consumption will weaken,” said Megan Greene, chief economist for the Kroll Institute. “So who’s right?”
At Nexgrill, a California-based seller of grills and other outdoor cooking equipment, sales of lower-end models, those under $500, have been strong so far this year, said Ramsay Hawfield, a vice president at the company. But sales of higher-priced products have begun to slow in recent months, which Mr. Hawfield takes to mean that some consumers are watching their budgets more closely.
“They’re not feeling as rich as they were a year or two ago, and now they’re feeling a little pinched and a little nervous,” he said. “The person that was buying that $500 or $600 grill is saying, ‘Maybe I’ll go with that $300 or $400 version.’”
Nexgrill isn’t laying off any workers, Mr. Hawfield said, and it is still investing in new products. But it is doing so carefully, avoiding features that consumers might not deem worth the extra cost. Retailers, he added, are pushing Nexgrill and other brands to keep prices down — something that was much less true a year ago, when consumers hardly seemed to look at price tags.
“They’re pushing us on ‘Let’s find a better price point,’” he said.
A gradual pullback by consumers would be welcomed by policymakers, who worry that continued free spending is fueling inflation. Consumer prices rose at a 4.2 percent annual rate in the first quarter, according to the data released Thursday, faster than at the end of last year and well above the Fed’s target of 2 percent. Fed officials will gather next week in Washington and are expected to raise rates for the 10th meeting in a row.
Policymakers will get a more up-to-date reading on the economy on Friday, when the Commerce Department will release income and spending data for March and the Labor Department will release data showing whether wage growth continued to slow in the first quarter, a key aim for the Fed.
What happens next may hinge on the labor market. Two years of high inflation and robust spending have eaten away at the stockpile of savings that many households built up early in the pandemic. But as long as companies keep hiring and wages keep rising, Americans will be able to keep spending. After-tax income rose at an 8 percent annual rate in the first quarter, adjusted for inflation, though the big jump was partly due to a cost-of-living adjustment that led to an increase in Social Security payments in January.
But if companies start laying off workers, consumers’ willingness to keep spending could evaporate in a hurry, said Dana Peterson, chief economist at the Conference Board, a business group. That would almost certainly push the economy into a recession.
“If you’re a consumer and you think you might lose your job, then you’re going to change your spending habits, and that’s what’s going to be a drag,” she said.
Filings for unemployment insurance have edged up in recent months, though they fell last week, and companies have been posting fewer job openings. So far, however, “it’s not a free fall,” Ms. Peterson said. “It’s a controlled descent, and that’s what the Fed is trying to achieve with higher interest rates.”
Still, the data released Thursday mostly predated the collapse of Silicon Valley Bank and the financial turmoil that followed. And there are more threats on the horizon, including a looming debt-ceiling showdown that could further destabilize financial markets. Early forecasts suggest that G.D.P. growth is likely to slow further in the second quarter, and many analysts think a recession is likely later this year.
“If we do have a shock, if we do have a debt ceiling debacle or something like that, that raises the probability in my mind that we go into a recession,” said Jay Bryson, chief economist for Wells Fargo.