First quarter economic growth was slowest in two years

On Monday, I wrote about newly released data which showed that in the first quarter of 2024, Minnesota was one of ten states where the economy shrank. But, of the national economy, the Star Tribune reported:

National first quarter growth, the slowest since spring 2022, accompanied a deceleration in consumer spending even as personal income rose in all 50 states.

Americans have pulled back on spending as elevated interest rates continue to take a toll. That’s what rate hikes intend to do: The Federal Reserve has raised its benchmark rate to a 23-year high of 5.25% to 5.5% in an effort to pump the brakes on the economy and bring inflation down to its 2% target.

Consumer Price Index data released June 12 showed U.S. inflation rose 3.3% year-over-year in May, prompting speculation that the Fed might lower rates this year.

This year “is shaping up to be a very different business environment and economic environment than what we saw last year,” [BMO Capital Markets chief U.S. economist and managing director Scott] Anderson said. “I do think we’re going to see more pressure on consumption continuing. Some of that is being made up for now with strong government spending and continued resilience in business investment, but we’re not sure that can last into the second half of the year.”

This echoes something I wrote when I looked at the outlook for the American economy back in December:

There are two more things to note.

First, this slowing of the growth of money and credit — indeed, its outright decline in recent months — has meant that the price of credit has gone up. You will have seen this in increased mortgage rates and interest rates on credit cards, for example. This has squeezed consumer spending. In August 2022, I saw a squeeze on people’s real incomes from inflation as one step towards a recession. That hasn’t happened, but that, I think, is because savings piled up during COVID-19 have cushioned Americans from that. As these savings have been unwound, however, this cushion will go and people will feel the squeeze more acutely.

Second, this fall in the inflation rate will, at some point, prompt the Federal Reserve to cut the funds rate. This should bring down interest rates across the economy and ease the squeeze on American consumers. If I’m right and inflation is back at 2.0% in March or April next year, the Fed will be under pressure to cut pretty promptly, especially with an election coming up.

To some extent, then, I see the American economy going into the new year as a race between two factors: one is the squeeze on American’s spending which will drive economic activity down and the other is loosening credit conditions as inflation falls and the Fed cuts rates which will, in the short term at least, drive economic activity up. We will see in 2024.

So far, this seems to be holding true.