U.S. economy expands at 1.1% annual rate in first quarter slowdown

The U.S. economy grew at a 1.1% annual rate in the first quarter, a notable slowdown from the previous three months, the Commerce Department said on Thursday.

Why it matters: The nation started the year with less economic momentum than anticipated. It's the latest sign that the Federal Reserve's campaign to cool economic activity is taking hold.

Catch up quick: First-quarter gross domestic product, adjusted for inflation, shows that the economy is still expanding. But growth has moderated since the second half of 2022.

• In the third quarter, GDP rose at a 3.2% annualized pace. That was followed by a 2.6% annualized gain in the final months of 2022.

Details: The biggest drag on economic growth last quarter came as businesses pulled back on inventory investment. That alone subtracted 2.3 percentage points from overall GDP, though the category can be volatile quarter-to-quarter.

• Sectors sensitive to the Fed's interest rate adjustments also weighed on the economy.
• That includes business investment — i.e. corporations pouring money into new equipment, buildings, and more — which slowed last quarter.

The intrigue: Consumer spending, however, continued to be the economy's bright spot as they spent more on cars and dining out.

• That category rose at a 3.7% annual rate last quarter — accelerating from the 1% pace the prior quarter.

What to watch: Economists are concerned about the road ahead for the economy. The banking system started to show signs of strain in the final weeks of the first quarter, with the failures of Silicon Valley and Signature Bank.

• It’s unclear what impact those collapses will have on the economy. There are also renewed fears about the banking sector as regional lender First Republic struggles.

Editor's note: This story was updated with additional information.