WASHINGTON, April 27 (Reuters) - U.S. economic growth slowed more than expected in the first, despite an increase in consumer spending, and activity is set to moderate further as the effects of higher interest rates spread.
Gross domestic product increased at a 1.1% annualized rate last quarter, the Commerce Department said in its advance estimate of first-quarter GDP growth on Thursday. The economy grew at a 2.6% pace in the fourth quarter. Economists polled by Reuters had forecast GDP rising at a 2.0% rate.
Despite the slowdown, which mostly reflected a drag from weak inventory investment, the Federal Reserve is on track to raise interest rates by another 25 basis points next week. The Fed has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75%-5.00% range.
Though the economy was not in recession last quarter, the landscape is now vastly different.
Credit conditions have tightened following recent financial market turmoil, which together with the Fed's fastest rate hiking cycle since the 1980s have raised the risks of a downturn by the second half of the year.
Following January's surge, which economists attributed to unseasonably mild weather and difficulties adjusting the data for seasonal fluctuations, economic reports have taken a weaker tone, with retail sales slumping in February and March.
Still, consumer spending grew at a rate faster in the January-March period than the pedestrian 1.0% pace logged in the fourth quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is being underpinned by a tight labor market, characterized by a 3.5% unemployment rate.
A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits decreased 16,000 to a seasonally adjusted 230,000 for the week ending April 22. Economists had expected 248,000 claims in the latest week. Though claims, which have elevated since March, remain well below levels that could raise alarm about the labor market, reduced access to credit for businesses and households is seen hurting demand and ultimately employment.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell 3,000 to 1.858 million during the week ending April 15, the claims report showed.
The so-called continuing claims data covered the period during which the government surveyed households for April's unemployment rate.
Continuing claims remain low by historical standards as some of the laid-off workers are quickly finding employment. There were 1.7 job openings for every unemployed person in February.
Despite the darkening clouds over the economy, some economists were hopeful that a recession would be avoided. They noted that fears of a downturn were pushing down prices of commodities like oil, which could help to reduce cost pressures for businesses and benefit the overall economy.
Oil prices have erased all their gains since the Organization of the Petroleum Exporting Countries and producer allies such as Russia announced in early April an additional output reduction until the end of the year.
