Elevated inflation and rising interest rates are beginning to take their toll on the housing and business sectors of the U.S. economy, but not on the consumer sector, which accounts for nearly two-thirds of the nation's Gross Domestic Product (GDP).

As a result, consumers have saved the U.S economy from another recession thus far, with real GDP growing at a moderate rate of 1.1% in the first quarter of 2023, according to a preliminary U.S. Bureau of Economic Analysis (BEA) report released on Thursday morning.

It was a significant decline from 2.7% growth in the fourth quarter of 2022 due to a drop in inventories and another contraction in residential fixed investment. They shaved off 2.3 percentage points from the GDP, compared with an additional 1.47 pp in Q4.

The decline in the business inventories and residential fixed investment was mitigated by a growth in consumer spending by 3.7%, up from 1.0% in the fourth quarter of 2023.

Cailin Birch, the global economist at the Economist Intelligence Unit (EIU), attributes the acceleration in consumer spending to a surge in personal incomes in January mainly due to one-off factors, including wage adjustments and a monthly drop in income tax payments.

"This fueled strong growth in consumer spending in January, which seems to have benefited the automotive sector," he told International Business Times. "However, real consumption growth slumped in February and March, suggesting that the growth seen in January is unlikely to be replicated later in the year."

Michael Reynolds, CFA, Vice President of Investment Strategy at Glenmede Investment Management, raises similar concerns about the future of consumer spending, especially among lower-income consumers.

"The consumer, which constitutes the lion's share of economic activity in the U.S., remained on solid footing in Q1," he told IBT, raising concerns that the January income stimulus may be among the last gasps of the stimulus-fueled gains in household spending.

"Also, there are signs that the lower end of the income stack is running out of its COVID excess savings in aggregate," he added. "With the highest marginal propensity to spend extra dollars, this cohort's spending habits will be important to watch going forward."

Reynolds sees the U.S. economy showing incremental signs of weakening but remaining on its feet for now. "However, several leading indicators such as the yield curve and tightening lending standards, among others, point to the strong possibility of recession later this year," he said. "Accordingly, investors should maintain a defensive risk posture since equity markets have rarely bottomed before the official start of a recession."

Birch expects real GDP to flatten in the second quarter and contract modestly in the third quarter, primarily in line with private consumption.

"This will amount to a technical recession, but we still expect the effects to be relatively mild," he added. "As inflation starts to moderate more noticeably toward the end of 2023, this should help to support renewed (but modest) growth in private consumption and overall GDP, which will likely support positive full-year growth of around 1% in 2023."

Meanwhile, Robert R. Johnson, Professor of Finance at Creighton University's Heider College of Business, sees the first quarter 2023 GDP report as a mixed bag for the Federal Reserve and the capital markets.

"In isolation, the lower-than-expected GDP growth of 1.1 percent annualized would seem to provide some impetus for the Fed to pause its rate hikes as most economists were looking for a much higher growth rate," he told IBT. "However, that news is counterbalanced by the GDP Price Index rising by a 4 percent annualized rate. Thus, there is no clear signal to the Fed that inflation is under control and that any change in current Fed policy is warranted."