The US economy grew at a rate of 1.6% during the first quarter slowdown

The US economy continued to grow but at a sharply slower rate early this year, as strong consumer spending was offset by pockets of weakness in other sectors.

Gross domestic product, adjusted for inflation, rose at an annual rate of 1.6 percent in the first three months of 2024, down from 3.4 percent at the end of 2023, the Commerce Department said Thursday.

If we look at this shift in growth in and of itself, it is not necessarily worrisome, especially since the Fed has been trying to cool down the economy. The weaker first-quarter numbers were driven in part by large shifts in business inventories and international trade, which often fluctuate dramatically from one quarter to the next. Underlying growth measures were stronger.

However, the slowdown came at the same time that the Fed's fight against inflation stalled: prices rose more quickly in the first quarter than at the end of last year. This raises the uncomfortable possibility that high interest rates are negatively affecting economic activity but are not succeeding in completely taming inflation.

But for now, consumers are ensuring continued growth. Spending rose 2.5 percent in the first quarter as lower unemployment and higher wages helped shoppers ignore higher interest rates and higher prices.

“Sentiment is not strong — people don't see the economy as being in good shape — but they personally are going out and spending,” said Brian Rose, chief economist at UBS. “They kind of seem to defy gravity.”

However, if consumers come back down to earth, the broader economy could be at risk. Companies invested less in new facilities in the first quarter, drawing down inventories — a sign they remain cautious despite strong sales.

“The consumer is still king – they are driving the growth story – and yet businesses have been very reluctant to invest,” said James Knightley, chief international economist at ING. “If something happens to the consumer, the growth story can unravel very quickly.”

Spending was driven particularly by wealthier consumers, whose lower debt and fixed-rate mortgages insulated them from the effects of higher interest rates, and who benefited from a stock market that until recently was at record highs.

However, low-income families are showing increasing signs of stress. They have increasingly turned to credit cards to make ends meet, and as interest rates rise, more of them are falling behind on their payments.

“There is a sense that lower-income households are under increasing pressure right now,” said Andrew Husby, chief US economist at BNP Paribas. “You're seeing a bifurcation in the American economy.”