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The U.S. economy slowed down in the first three months of 2024, report shows

SCOTT DETROW, HOST:

But first, the U.S. economy downshifted the first three months of this year. The government report out today shows the economy grew less than half as fast in the first quarter as it did during the previous three months. The news triggered a sell-off in the stock market. The Dow Jones Industrial Average tumbled 375 points. NPR's Scott Horsley joins me now. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi - good to be with you.

DETROW: So investors were not happy about the slowdown. How big of a concern is this?

HORSLEY: Today's report shows the economy grew at an annual rate of just 1.6% in the first quarter. That is a marked downshift from the previous quarter, when we grew at nearly 3.5%. But, you know, that headline figure may overstate just how hard we hit the brakes. Some of the drop-off came from one-time factors, which really don't tell us much about the underlying economy.

If you zoom in on consumer spending, which is the biggest driver of economic growth, that actually held up pretty well. Americans did spend less on big-ticket items like cars and furniture in the first three months of the year. Those things are often financed, so high interest rates are likely taking a toll. But economist Shannon Grein of Wells Fargo notes people continue to ramp up their spending on services like restaurant meals and travel.

SHANNON GREIN: I think the overall report was still consistent with an economy that's pretty much firing on all cylinders.

HORSLEY: Indeed, services spending rose at an annual rate of 4% in the first quarter, which is fast enough to keep the economy chugging along and potentially fast enough to put some upward pressure on inflation. In fact, today's report shows a key measure of inflation ticked up in the first quarter, so that's something the Federal Reserve is going to be keeping a close eye on.

DETROW: And, of course, they've been keeping interest rates high. How are people paying for all of this spending?

HORSLEY: You know, some people are relying on credit to finance their spending, which is costly if you don't pay off that balance every month. But a lot of this spending is being bankrolled by people's paychecks. You know, we still got a very strong labor market. Lots of people are working. Wages are going up. And most people are not saving a lot of what they earn, so that money's going right back out the door as spending.Today's report also shows business investment held up pretty well in the first quarter, and there was a surprisingly big jump in housing investment.

DETROW: Yeah. That was interesting, especially since, as we've been saying throughout the conversation, mortgage rates are still pretty high. What's going on there?

HORSLEY: Yeah. Those high mortgage rates are definitely dragging down the housing market. Sales of existing homes are down, and there aren't a lot of older homes on the market, but that's giving an unexpected boost to new home construction. Investment in new homes was way up in the first quarter. Shawn Woods is a home builder in Kansas City. He says about 1 out of 3 homes sold in that area is now newly built.

SHAWN WOODS: The inventory that people can find for a new home is new construction, which is great for us as homebuilders, helping out our sales a lot. March and April have been really good months. We're looking for continued good momentum through the spring.

HORSLEY: Woods and other home builders have also been downsizing some of their homes, maybe cutting back on some of the luxury finishes in order to craft a product that home buyers can afford.

WOODS: Before the pandemic, there's no way we could get under really 325,000, and we have reengineered some of our plans, taken different specifications and things like that. And we're bringing new homes to the market now in the 286 to 290 range, starting price. So that's helped immensely.

HORSLEY: That's especially important now that mortgage rates are up above 7%.

DETROW: That's NPR's Scott Horsley. Scott, thanks so much.

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

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

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.