U.S. economic growth was much weaker than expected at the start of the year and prices rose faster, the Commerce Department reported Thursday.
According to the ministry’s Bureau of Economic Analysis, gross domestic product, a broad measure of goods and services produced in the January-March period, rose a seasonally adjusted 1.6% on an annual basis.
Economists surveyed by Dow Jones had expected a rise of 2.4%, after a rise of 3.4% in the fourth quarter of 2023 and 4.9% in the previous period.
Consumer spending rose 2.5% in the period, compared with a 3.3% gain in the fourth quarter and below Wall Street’s estimate of 3%. Fixed investment and government spending at the state and local levels helped GDP remain positive in the quarter, while a decline in private inventory investment and a rise in imports detracted. Net exports reduced the growth rate by 0.86 percentage points, while consumer spending contributed 1.68 percentage points.
There was also bad news on the inflation front.
The personal consumption expenditure price index, a key inflation variable for the Federal Reserve, rose 3.4% on an annual basis in the quarter, the largest increase in a year and up from 1.8% in the fourth quarter. Excluding food and energy, core PCE prices rose 3.7%, well above the Fed’s 2% target. Central bank officials tend to focus on core inflation as a stronger indicator of long-term trends.
The price index for GDP, sometimes called the “chain-weighted” level, rose 3.1%, compared with the Dow Jones estimate of a 3% increase.
Markets plunged following the news, with futures tied to the Dow Jones Industrial Average falling more than 400 points. Treasury yields rose, with the benchmark 10-year note last at 4.69%.
“This was the worst report of both worlds — slower-than-expected growth, higher-than-expected inflation,” said David Donabedian, chief investment officer of CIBC Private Wealth US. “We are not far away from any interest rate cuts going against investor expectations. That forces it.” [Fed Chair Jerome] Powell sets a hawkish tone next week [Federal Open Market Committee] meet.”
In the report, markets are unsettled about the state of monetary policy and when the Federal Reserve will begin cutting its key interest rate. The federal funds rate, which determines what banks charge each other for overnight loans, is in a targeted range of between 5.25% and 5.5%, the highest in about 23 years, although the central bank has had none since July 2023 increase has been made.
Investors have had to adjust their view of when the Fed will begin easing as inflation remains high. The view expressed in futures trading is that rate cuts will begin in September, with the Fed likely only cutting once or twice this year. Futures prices have also changed following the GDP release, with traders now pointing to a cut only in 2024, according to CME Group calculations.
“The economy will likely continue to slow in subsequent quarters as consumer spending is likely nearing an end,” said Jeffrey Roach, chief economist at LPL Financial. “Savings interest rates are falling as stubborn inflation puts more pressure on consumers. We should expect inflation to ease later this year as aggregate demand weakens, although the path to the Fed’s 2 percent target remains a long way off.”
Consumers have generally kept pace with inflation since it soared, although rising inflation has hurt wage increases. The personal savings rate fell to 3.6% in the first quarter from 4% in the fourth quarter. Income adjusted for taxes and inflation rose from 2% to 1.1% in the reporting period.
Spending patterns also changed during the quarter. Spending on goods fell 0.4%, largely due to a 1.2% decline in major purchases of durable goods classified as consumer durables. Services spending rose 4%, the highest quarterly figure since the third quarter of 2021.
A buoyant labor market has helped support the economy. The Labor Department reported Thursday that initial jobless claims totaled 207,000 for the week of April 20, down 5,000 and below the 215,000 estimate.
In a possible positive sign for the real estate market, residential investment rose 13.9%, the largest increase since the fourth quarter of 2020.
Thursday’s release was the first of three tables the BEA is conducting for GDP. The first quarter figures are subject to significant revisions – in 2023 the first first quarter figure was only an increase of 1.1%, which was ultimately increased to 2.2%.
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2024-04-25 13:43:26
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