The U.S. Commerce Department reported on Thursday that U.S. economic growth was far weaker than expected at the beginning of the year and prices were rising faster.
gross domestic productGDP, a broad indicator of goods and services produced between January and March, grew at an annualized rate of 1.6%, adjusting for seasonality and inflation, according to the department’s Bureau of Economic Analysis.
Economists surveyed by Dow Jones had expected economic growth of 2.4%, compared with 3.4% growth in the fourth quarter of 2023 and 4.9% growth in the previous quarter.
Consumer spending grew 2.5% over the same period, slower than the 3.3% increase in the fourth quarter and below Wall Street expectations of 3%. Fixed investment and government spending at the state and local levels helped keep GDP positive in the quarter, while a decline in private inventory investment and an increase in imports had a negative impact. Net exports lowered the growth rate by 0.86 percentage points, while consumer spending contributed 1.68 percentage points.
There’s also some bad news on the inflation front.
The personal consumption expenditures price index, the Fed’s key inflation variable, grew at an annualized rate of 3.4% this quarter, the largest increase in a year and higher than the 1.8% increase in the fourth quarter. Excluding food and energy, core PCE prices rose 3.7%, both well above the Fed’s 2% target. Central bankers tend to focus on core inflation as a better indicator of longer-term trends.
The GDP price index (sometimes called the “month-on-month weighted” level) grew at a rate of 3.1%, compared with the Dow Jones estimate of 3% growth.
Markets plummeted after the news broke, with Dow Jones Industrial Average futures falling more than 400 points. U.S. Treasury yields are higher, with the benchmark 10-year note yield recently at 4.69%.
“This is the best of both worlds – lower than expected growth and higher than expected inflation,” said David Donabedian, chief investment officer at CIBC Private Wealth US. That forces (Fed Chairman Jerome) Powell to adopt a hawkish tone at next week’s (Federal Open Market Committee) meeting.
The report comes as markets are nervous about the state of monetary policy and when the Federal Reserve will start lowering its benchmark interest rate. The federal funds rate, which sets what banks charge for overnight lending between banks, targets a range of 5.25%-5.5%, the highest level in about 23 years, although the central bank has not raised rates since July 2023.
With inflation still high, investors are having to adjust their views on when the Fed will begin easing. The view expressed through futures trading is that rate cuts will begin in September, and the Fed may only cut rates once or twice this year. Futures pricing also changed after the GDP release, with traders now pointing to just one rate cut in 2024, according to CME Group calculations.
“The economy is likely to decelerate further in the coming quarters as consumers’ consumption spending may be coming to an end,” said Jeffrey Roach, chief economist at LPL Financial. “As sticky inflation puts more pressure on consumers, savings will Rates are falling. We expect inflation to moderate this year as aggregate demand slows, although the path to the Fed’s 2% target still looks long.”
Consumers have generally kept pace with inflation since it began surging, even as rising inflation has eroded wage growth. The personal savings rate fell to 3.6% in the first quarter from 4% in the fourth quarter. Revenue, adjusted for taxes and inflation, grew 1.1% over the same period, down from 2%.
Spending patterns have also changed this season. Spending on goods fell 0.4%, largely due to a 1.2% decline in purchases of big-ticket durable items. Services spending grew 4%, the highest quarterly level since the third quarter of 2021.
An active labor market helps support the economy. The U.S. Department of Labor reported Thursday that initial jobless claims totaled 207,000 in the week of April 20, a decrease of 5,000 and below expectations of 215,000.
Residential investment surged 13.9%, the largest increase since the fourth quarter of 2020, which may be a positive sign for the real estate market.
The data released Thursday is the first of three GDP tables released by the Bureau of Economic Analysis. The first-quarter data is likely to be revised significantly – in 2023, the first-quarter data initially increased by only 1.1%, eventually reaching 2.2%.
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