The American Economy is Strongly Slowing Down and Losing Strength

In the first quarter of this year, the American economy recorded GDP growth of only 1.1 percent quarterly, representing a strong slowdown compared to 2.6 percent and 3.2 percent growth in the fourth and third quarters of last year, according to the Focus of the Week analysis by the Croatian Employers’ Association, authored by their chief economist Hrvoje Stojić.

The main negative impact comes from significantly weaker inventory accumulation, which may be one of the signs of pessimism regarding business prospects in the upcoming period. Personal consumption, which accounts for about two-thirds of GDP, even accelerated its growth to 3.7 percent. In this case, it represents more than twice the stronger dynamics compared to the previous two quarters, thanks to a continuously strong labor market and special effects such as increased social benefits and tax advantages due to the adjustment of the tax wedge for inflation.

Overall, disposable income jumped 12.5 percent in the first quarter.

A Decline is Still Expected

To everyone’s surprise, after seven extremely negative quarters, there has finally been a significant stabilization in the housing construction sector, where the decline has ‘dropped’ to only -4.2 percent from a recent -25 percent.

Construction companies in this area are likely already feeling a recovery in demand after a sharp drop in housing prices and the expected imminent peak in financing costs. Companies have simultaneously invested less in equipment but increased investments in real estate and software.

In the second half of this year, a decline is still expected in line with the delayed negative impact of the cumulative monetary tightening by the Federal Reserve so far.

Additionally, problems in the segment of small and medium-sized banks (key for credit activity) along with the increasing appetite of authorities for regulating the financial industry will worsen financing conditions for some time.

In this context, it fits with the fact that growth in the first quarter was mainly based on extremely strong January data. Data for February and March were already noticeably weaker. Furthermore, numerous survey indicators, such as the ISM purchasing manager indices, clearly indicate a weakening of economic activities.

For the year 2023, GDP growth of one to 1.5 percent is expected, followed by a smaller decline of up to -0.5 percent in 2024.