American Economic Growth Slows To 1.1% In First Quarter

American Economic Growth Slows to 1.1% in Q1 2023

The American economy grew at a slower pace in the first quarter of 2023, with a 1.1% annualized rate, marking a significant slowdown from previous quarters. This is due to various headwinds that continue to slow recovery from the lockdown-induced recession. However, there were increases in consumer spending, exports, nonresidential investment, and government spending, according to an advance estimate released by the Bureau of Economic Analysis.

Inflationary Pressures and Real Disposable Personal Income

The economic data comes as inflationary pressures, largely induced by the supply chain bottlenecks and labor shortages, raise expenses and diminish purchasing power for American consumers and businesses. Inflation reached 5.0% last month, marking relative relief from the 9.1% rate witnessed last summer. However, prices for many items remain elevated, and wage increases fail to keep pace with price levels. The reprieve in headline inflation coincided with greater real disposable personal income, which increased 8.0% in the first quarter of 2023 relative to a 5.0% increase in the fourth quarter of 2022. The personal saving rate, the portion of disposable income saved by households, meanwhile increased 4.8% in the first quarter of 2023, an increase from the 4.0% increase in the fourth quarter of 2022.

Concerns in the Financial System

Economic actors were also concerned in the first quarter by the sudden failure of Silicon Valley Bank and Signature Bank. The implosion of the financial institutions prompted financial regulators to secure both insured and uninsured accounts to prevent additional bank runs. Officials at the Federal Reserve concluded in a meeting last month that the turmoil in the financial system warrants a recession forecast for the end of the year, followed by a recovery over the subsequent two years.

Monetary Policy and Target Federal Funds Rate

Monetary policymakers have also worked to increase the target federal funds rate over the past year, thereby combatting inflationary pressures while dampening economic activity as consumers and businesses see the cost of borrowing money increase. Assets in the overall banking system are presently $2 trillion lower than their book value due to the elevated interest rates, prompting additional worries about the sector’s stability.

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