May 10, 2023

USA’s Slower Q1 GDP Growth Reflects Challenges of Taming Inflation: NRF

The US economy is growing, albeit at a slower pace, and inflation continues to be a challenge for policymakers, National Retail Federation (NRF) Chief Economist Jack Kleinhenz said in the May issue of NRF’s Monthly Economic Review. He explained that despite the US government ending its public health emergency declaration and the World Health Organization stating that the pandemic is over, the economic difficulties resulting from the Covid-19 pandemic persist.

For the past year, the Federal Reserve has been trying to bring inflation under control by raising interest rates. However, the effort has yet to reach its goal, and results from the first quarter show that taming inflation without tipping the nation into a recession remains a formidable challenge.

“A slowdown in GDP is normally seen as a negative, but in the current context is key to controlling inflation,” Kleinhenz said. “Fortunately, the economic data is not consistent with a typical recession.”

Despite GDP growth slowing to a modest 1.1% annual rate from the average 3% in the previous two quarters, the U.S. economy “remained in gear” during the first quarter, with consumer spending growing 6.5% and disposable personal income seeing annual growth of 8.4%. However, inflation as tracked by the Personal Consumption Expenditures Price Index – the Fed’s preferred measure – was 4.9% year over year in the first quarter. This was down from 5.7% in the fourth quarter and far below the 6.4% seen a year earlier. The core PCE index, which excludes volatile food and energy prices, was at 4.7%.

The Employment Cost Index showed growth in private manufacturing wages and salaries dropped to 4.9% in the first quarter from 5.1% the quarter before but remained above the 3.5% rate needed to be consistent with the Fed’s 2% inflation target. Heading into the second quarter, employment numbers were better than expected despite high interest rates, with a net jobs gain of 253,000, a year-over-year wage increase of 4.4% and the unemployment rate of 3.4% tying January for the lowest in more than 50 years.

In the face of these numbers, the Fed has raised interest rates another quarter-point to an upper bound of 5.25%. Chairman Jerome Powell said sentiment on the Fed’s Federal Open Market Committee favours a pause in interest rate hikes, but the panel is not yet ready to commit. Kleinhenz said the key questions are how the Fed will know when to stop raising rates and how soon after that it will start to lower them.