The US economy loses strength in the first quarter of 2023

Despite the slowdown, reflecting mostly the drag from weak inventory investment, the Federal Reserve is on track to raise interest rates another 25 basis points next week. Since last March, the Federal Reserve has raised its interest rates by 475 basis points, from near zero to the current range of 4.75% to 5.%.

Although the economy was not in a recession last quarter, the picture is very different now.

Credit conditions have tightened following the recent turmoil in financial markets, which, coupled with the Federal Reserve’s fastest rate hike cycle since the 1980s, has increased downside risks for the second half of the year.

Following the rebound in January, which economists blamed on unusually mild weather and difficulties adjusting the data for seasonal fluctuations, economic reports have taken a softer tone, with retail sales falling in February and March.

Even so, consumer spending grew at a faster rate in the January-March period than the modest 1% recorded in the fourth quarter. Consumer spending, which accounts for more than two-thirds of US economic activity, is supported by a tight labor market characterized by an unemployment rate of 3.5%.

A separate report from the Labor Department showed Thursday that initial claims for state unemployment benefits decreased by 16,000, to a seasonally adjusted 230,000, in the week ending April 22. Economists expected 248,000 applications in the last week.

Although claims, which have risen since March, remain well below levels that could raise alarm bells about the labor market, reduced access to credit for businesses and households is seen as hurting demand and, ultimately, employment.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell by 3 billion to 1.858 million during the week ending April 15, the claims report showed.

The so-called continuing claims data covered the period during which the government surveyed households for the April jobless rate.

Ongoing claims remain low compared to historical levels, as some of the laid-off workers are quickly finding employment. In February there were 1.7 job offers for every unemployed person.

Despite the dark clouds hanging over the economy, some economists were hopeful of avoiding a recession. They noted that fears of a recession were driving down prices for raw materials such as oil, which could help reduce cost pressure for businesses and benefit the broader economy.

Oil prices have wiped out all their gains since the Organization of the Petroleum Exporting Countries and producing allies such as Russia announced in early April a further reduction in production until the end of the year.

With information from Reuters