Dive Brief:

• Seventy-six percent of small business owners believe that they can weather a recession, Bank of America said Thursday, moments before the Commerce Department reported that economic growth downshifted to a 1.1% annual rate during the first quarter from a 2.6% pace during the final quarter of last year.
• Most small businesses (65%) expect to increase revenue during the next 12 months, Bank of America found in a survey of more than 1,000 business owners nationwide. Thirty-four percent of the respondents expect the economy to strengthen during the same period.
• “While the dual pressures of inflation and supply chain disruptions continue to encumber operations, small business owners remain bullish about their prospects for the year ahead,” Sharon Miller, Bank of America’s president of small business, said in a statement.

Dive Insight:

Falling business investment, along with a decline in spending on housing, partly held back the gain in gross domestic product from higher consumer spending and exports, the Commerce Department said.

Purchases of motor vehicles and auto parts stoked growth during the first three months of the year, according to the Commerce Department. Consumers also stepped up spending on health care, food services and accommodations.

“Overall momentum is slowing, but the strength of the consumer continues to exceed expectations,” Olu Sonola, head of regional economics at Fitch Ratings, said.

First quarter economic growth “surprised a bit to the downside,” Sonola said, noting that residential investment has shrunk for eight straight quarters. Still, “the underlying resilience of the U.S. consumer was on full display.”

Consumer spending — which accounts for about 70% of GDP — may falter in coming months and pull the economy into recession, according to some economists. Federal Reserve economists, citing banking system turmoil, said that a mild downturn is likely to begin this year, according to minutes of a March 21-22 monetary policy meeting.

Retail spending declined in February and March. Consumer confidence fell this month to the lowest point since July 2022, persisting below a level that usually presages recession during the following 12 months, the Conference Board said Tuesday.

Manufacturing and the job market have cooled since the Fed in March 2022, seeking to curb high inflation, began the most aggressive pullback in monetary stimulus in 40 years in an effort to curb inflation.

Fed officials, after months of pledging to reduce inflation to their 2% target, begin a two-day policy meeting on May 2 while confronting data that warn of “stagflation,” or a mix of stubborn price pressures and flagging economic growth.

The Fed’s preferred measure of inflation — the core personal consumption expenditures price index — rose 4.9% during the first quarter compared with 4.4% during the fourth quarter of last year, the Commerce Department said Thursday.

Investors on Thursday set 90% odds that the Fed on May 3 will hike the main interest rate by 0.25 percentage point, according to the CME FedWatch Tool.

On Wednesday, before the reports on GDP growth and inflation, investors saw 72% odds of a quarter-point increase, according to CME, which calculates expectations based on trading in interest-rate futures markets.

Several policymakers in recent weeks have said that banking system turmoil may increase a credit tightening that began late last year, bolstering the Fed’s pullback in accommodation. The central bank since March 2022 has raised the federal funds rate from near zero to a range between 4.75% and 5%.

Amid high inflation — and with demand for labor exceeding supply — 79% of small business owners increased prices during the past 12 months and 53% sought to retain talent by increasing benefits, Bank of America said.

Small business owners ranked inflation and the risk of recession as their top concerns, Bank of America said.