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Economic growth slows, in line with Fed's goal of cooling inflation

FILE - People shop at a grocery store in Buffalo Grove, Ill., Sunday, March 19, 2023. (AP Photo/Nam Y. Huh)
FILE - People shop at a grocery store in Buffalo Grove, Ill., Sunday, March 19, 2023. (AP Photo/Nam Y. Huh)
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Newly released data shows the U.S. economy is continuing to cool but has remained in positive territory.

Some economists think we still have a fighting chance to avoid a recession.

Moody’s Analytics Chief Economist Mark Zandi said recession risks are uncomfortably high, but "the core of the economy is in a pretty good spot."

He said we can get through the next 12 to 18 months without an outright economic downturn under the right policy from the Federal Reserve and assuming lawmakers increase the debt limit soon and "limit the drama."

And Colorado State University economist Stephan Weiler said he's "stubbornly still of the 'soft landing' crew," holding out hope that the outcome is achievable.

Both men were reacting to a government update Thursday showing the gross domestic product increased at an annual rate of 1.1% in the first quarter.

Weiler said this GDP release was a "temperature check" for the economy.

Both Zandi and Weiler said it was a good number – the kind of number the Fed wants to see as it tries to tame inflation.

"Hopefully this is where it stays for the next year, because if so, that would be just enough growth to avoid a recession but slow enough growth that it would take the steam out of the inflation," Zandi said.

This continues a gentle decrease in economic growth, as real GDP had increased by 2.6% in the fourth quarter of last year and 3.2% in the quarter before that.

Consumer and government spending drove GDP growth in the first quarter of the year.

Housing continued to be one of the drags on GDP, with higher mortgage rates and the loss of affordability creating problems for buyers. Zandi said trouble in the banking sector is likely to also hurt builders seeking credit.

Consumers are 70% of the economy, and they continued to show resilience.

"That's key," Zandi said. "I mean, the consumer is the firewall between a recession and no recession, and the firewall is still up. So, that's good."

Weiler noted that Americans are seemingly getting more cautious, as the personal saving rate increased to 4.8% from 4% in the previous quarter.

“But I don't think that's a bad thing,” he said.

Weiler said wages are starting to find balance with current inflation, which sits at 5%. But American wages are still at a net loss from the high inflation, which peaked at 9.1% last June.

Zandi said we don’t need to see job losses to further drive down inflation, but we do need less job growth.

The unemployment rate, 3.5%, is around a 50-year low. Zandi said if that moves closer to 4%, wage growth should sufficiently slow.

Weiler said the Fed’s target of 2% inflation may be unrealistic. And a relentless policy that pushes us to that target could needlessly crash the economy, he said.

Weiler said we can live with both an inflation rate and wage rate increase of 3% to 4%.

“I think that's where we're headed,” he said. “And I have a feeling that the Fed may actually at that point call it good.”

The GDP in a normal, healthy economy would be 2.5% to 3%, Weiler said.

He said we’re likely to see further slowing beyond the 1.1% first-quarter GDP, but he said he hopes to see it stay above zero.

Weiler said he expects one more Fed rate hike before officials pause that activity and monitor the effects of their work.

Zandi said he’s not in favor of any more interest rate hikes, but he also doesn’t think a quarter-point increase will kill us.

Inflation is coming in, he said. It's still too high, but it's moving in the right direction with increasing certainty.

“It looks like it's going to get back to something that we all feel pretty good about over the coming year,” Zandi said.

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