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U.S. growth slowed sharply last quarter to 1.6% pace, reflecting an economy pressured by high rates

The latest report from the Commerce Department reveals that the United States economy hit the brakes hard in the last quarter, registering a sluggish 1.6 per cent annual growth rate. This downturn is attributed to soaring interest rates, which have put a strain on economic activity. However, despite the slowdown, consumer spending, which plays a pivotal role in driving economic growth, remained robust.

The deceleration from the previous quarter's impressive 3.4 per cent growth rate is notable. A significant factor contributing to this downturn was a surge in imports, which deducted nearly 1 percentage point from the growth rate. Additionally, businesses scaled back their inventories, further dampening growth. These fluctuations in import and inventory levels often have a substantial impact on quarterly economic performance.

Nevertheless, key sectors of the economy still show resilience. Both households and businesses contributed to economic activity, with strong investment levels recorded last quarter. Despite the volatile import and inventory figures, economists like Paul Ashworth from Capital Economics believe there is underlying positive momentum in the economy.

However, persistent inflation remains a concern for the Federal Reserve. The report indicates that inflation accelerated to a 3.4 per cent annual rate in the first quarter, up from 1.8 per cent in the previous quarter. Core inflation, excluding volatile food and energy prices, also saw a significant rise. This inflationary pressure underscores the challenges faced by policymakers in balancing economic growth with price stability.

Consumer spending, a crucial driver of economic activity, maintained a solid pace, increasing at a rate of 2.5 per cent annually. While spending on services saw a notable uptick, purchases of goods experienced a slight decline for the first time since 2022.

Experts like Gregory Daco acknowledge the solid foundation of the economy but highlight a cooling momentum compared to the previous year. Despite this, the United States economy continues to outperform other advanced economies globally.

Looking ahead, factors such as interest rate policies and international trade dynamics will likely shape economic performance in the coming quarters. With inflationary pressures persisting, the Federal Reserve faces the challenge of supporting growth while managing price stability.

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