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Economic growth slowed the first three months of the year

MELISSA BLOCK, HOST:

First, we're going to hear about the latest indicator on what's happening with the economy. Americans spent a lot of money on new cars and trucks this winter, but the overall economy shifted into the slow lane. That's according to a report today from the Commerce Department. It shows the economy grew less than half as fast in the first three months of this year as it did in the final months of 2022. So is the country headed for a recession? Well, NPR's Scott Horsley has been combing through the details of the report, and he joins us now.

Scott, how big a slowdown are we talking about?

SCOTT HORSLEY, BYLINE: Well, the headline suggests we hit the brakes pretty hard. GDP grew at an annual rate of just 1.1% in the first quarter. That's down from 2.6% in the final months of last year. But a lot of that drop just reflects a big swing in inventories, which is not that unusual. Businesses can build up stockpiles one quarter, draw them down the next, and that doesn't really tell you how the overall economy's doing. Personal spending, which is a much more important gauge, actually revved up during the first quarter, thanks, in part, to that spending on cars and trucks you mentioned. Mark Zandi, who's chief economist at Moody's Analytics, says that's a positive sign.

MARK ZANDI: No one's out there spending with abandon, but they are spending enough to keep the economy moving forward, because at the end of the day, the American consumer is the firewall between a recession and an economy that moves forward. And right now the firewall is holding firm.

HORSLEY: However, we are starting to see some cracks in that firewall. So it's an open question whether the economy keeps moving forward in the months to come.

BLOCK: So cracks in the firewall - what kind?

HORSLEY: Well, a big chunk of that personal spending happened in the very first month of the new year. Remember, employers added more than half a million jobs back in January. That's also when Social Security recipients got a big 8.7% cost of living adjustment. So people had some extra money to spend in January, and in many cases they spent it. But economist Kathy Bostjancic of Nationwide says the extra spending started to peter out as we got further into February and March.

KATHY BOSTJANCIC: The momentum slowed markedly. Overall, it looks as if consumer spending is soft going into the second quarter. And that's meaningful because consumer spending's such a large driver of overall growth.

HORSLEY: Corporations are still raising prices, but they're starting to get some pushback from consumers who are watching their pennies a little more closely. The CEO of McDonald's said this week he expects to see a mild recession in the U.S. later this year.

BLOCK: And what does today's report suggest about that? Is a recession coming?

HORSLEY: Maybe, but not necessarily. Remember, a lot of this slowdown is happening by design as the Federal Reserve raises interest rates in an effort to curb inflation. And right now forecasters are divided over whether the Fed can do that and just slow the economy or if the economy is actually going to start going backwards. Zandi is in the optimistic camp. He thinks we might avoid tipping into recession.

ZANDI: I think we have got a fighting chance to skirt an outright economic downturn. I mean, I don't want to be Pollyannaish. I mean, it's going to be a tough six, 12, 18 months. But with a little bit of luck and with some reasonably good policymaking by the Fed, I think we can make our way through without an outright downturn.

HORSLEY: Now, the Fed is expected to raise interest rates by another quarter percentage point next week, but that could be the last rate hike for a while. The Fed's keeping a close eye on what's happening to bank lending after the collapse of those two big regional banks last month. If other lenders get more stingy with their credit, that acts like another brake on economic growth. And then there's the total wild card of what happens with the fight over the debt limit here in Washington. You know, government spending was actually a boost for the economy in the first quarter. Big cuts in spending could have the opposite effect.

BLOCK: OK. NPR's Scott Horsley.

Scott, thanks so much.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.