US consumer spending drives Q1 figures

The US economy is predicted to have continued growing strongly in the first quarter, driven by solid consumer spending. However, recent higher interest rates have slowed this momentum. The Commerce Department’s report on Thursday is expected to reveal that the economy is nowhere near recession, but there are concerns that the risks of a downturn could arise later in the year, following tightened credit conditions and a high rate-hiking cycle by the Federal Reserve.

There was a weak tone in economic reports following January’s surge, which was attributed to unseasonably mild weather and difficulties in adjusting the data for seasonal fluctuations. Furthermore, retail sales fell in February and March, prompting Will Compernolle, macro strategist at FHN Financial in New York, to note that businesses could be hesitant to invest or face tighter credit conditions.

Economists estimated that GDP growth rose at a 2.0% annualised rate in the last quarter, having risen at a 2.6% pace in the fourth quarter. The US central bank is expected to remain on track to raise interest rates by another 25 basis points next week. Meanwhile, orders for non-defence capital goods excluding aircraft fell for a second straight month in March, leading some institutions to cut their GDP growth estimates.

Reduced access to credit for businesses and households is expected to hurt demand and ultimately employment, even though unemployment is at a 3.5% rate. While claims for state unemployment benefits remain below levels that could raise alarm, business investment in equipment is expected to have contracted for a second straight quarter. The housing market is also predicted to have contracted for an eighth straight quarter. However, some economists argue that fears of a recession are pushing down the prices of commodities like oil, which could reduce cost pressures for businesses and benefit the overall economy.

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