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U.S. economic growth slowed more than expected in the first quarter as an acceleration in consumer spending was offset by businesses liquidating inventories in anticipation of weaker demand later this year amid higher borrowing costs.
The first decline in private inventories in 1-1/2 years reported by the Commerce Department in its snapshot of first–quarter gross domestic product on Thursday is potentially good news for the economy this quarter as it faces a possible recession by year end. There had been fears that a correction of the inventory bloat would result in a sharper economic downturn.
Last quarter‘s decline raised hope that businesses were close to getting rid of unwanted stock, which would put them in a better position to rebuild inventory, should the need arise.
“Leaner inventories mean second-quarter GDP is on a solid foundation,” said Chris Low, chief economist at FHN Financial in New York. “Of course, what is built on that foundation depends on many things, including job and income growth as well as confidence and credit availability.”
Gross domestic product increased at a 1.1-percent annualized rate last quarter, the government said in its advance estimate of first–quarter GDP growth. The economy grew at a 2.6 percent pace in the fourth quarter. Economists polled by Reuters had forecast GDP rising at a 2-percent rate.
Private inventory investment declined at a $1.6 billion pace, the first decrease since the third quarter of 2021. The drop, led by wholesalers and manufacturers, followed a $136.5 billion rate of increase in the fourth quarter.
Economists said the drawdown appeared to be both planned as businesses were likely reluctant to add to stockpiles of unsold goods and the result of stronger consumer spending.
Inventories chopped off 2.26 percentage points from GDP growth, the most in two years, after adding 1.47 percentage points in the prior quarter. Business spending on equipment contracted for a second straight quarter. Overall business investment was tepid, likely due to narrowing profit margins.
Residential investment recorded its eighth consecutive quarterly drop though the pace of decline slowed considerably from the October-December period.
