US economy stronger than reported at start of 2023

US economic growth was stronger than previously reported at the start of the year – news that could help bolster the case for higher interest rates in the world’s largest economy. The Commerce Department said the latest data showed the US economy grew at an annual rate of 2% in the first three months of the year.

Its first estimate put growth at 1.1% in the January to March period. The boost reflected stronger consumer spending than previously understood. The US central bank has been trying to cool the economy, aiming to ease the pressures pushing up prices.

It has raised its key interest rate by five percentage points since March 2022, to more than 5%, and signalled that more hikes are in the offing. The moves had raised concerns that they might lead to a painful slowdown, as higher rates weigh on activity, such as spending and business expansions.

Many companies had reported concerns about the outlook earlier this year, but hiring has remained strong and other data has painted a brighter picture.

As well as consumer spending, the Commerce Department said exports were also greater than previously reported.

Analysts said the report did not shift the overall picture of inflation. Consumer prices in the US rose 4% over the 12 months to May, according to the Labor Department. That was the slowest pace in two years, reflecting declines in costs for fuel since last year’s spike.

But prices of many other items have continued to rise. So-called core inflation, which strips out energy and food items and economists say is a better measure of underlying pressures, was 5.3%.

At a meeting in Europe this week, the head of the Federal Reserve, Jerome Powell, said he did not think current policy was doing enough to combat inflation.

“Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough,” Mr Powell said during a panel hosted by the European Central Bank in Portugal.

Scott Hoyt, senior director at Moody’s Analytics, said he expected the economy to struggle as the Fed focuses on its inflation fight, but still manage to avoid outright decline.

“The economy remains admirably resilient, and odds of a recession beginning this year are receding. But the coast is far from clear,” he said.

Source: BBC Business