The US Commerce Department said Thursday that US economic growth was much weaker than expected at the beginning of the year, and prices rose at a faster pace.
Gross domestic product, a broad measure of goods and services produced from January to March, rose at an annual rate of 1.6% when adjusted for seasonality and inflation, according to the department's Bureau of Economic Analysis.
Economists surveyed by Dow Jones were looking at a 2.4% increase after a 3.4% increase in the fourth quarter of 2023 and 4.9% in the previous period.
Consumer spending rose 2.5% during the period, down from a 3.3% gain in the fourth quarter and below Wall Street estimates of 3%. Fixed investment and government spending at the state and local levels helped keep GDP positive during the quarter, while discounting lower investment in private inventory and higher imports. Net exports subtracted 0.86 percentage points from the growth rate, while consumer spending contributed 1.68 percentage points.
There was some bad news on the inflation front as well.
The personal consumption expenditures price index, a key inflation variable for the Fed, rose at an annual pace of 3.4% during the quarter, its biggest gain in a year and up from 1.8% in the fourth quarter. Excluding food and energy, core PCE prices rose 3.7%, both 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 “series-weighted” level, rose at a rate of 3.1%, compared to a Dow Jones estimate of a 3% increase.
Markets fell on the news, with futures tied to the Dow Jones Industrial Average falling more than 400 points. Treasury yields have been rising, with the benchmark 10-year note recently reaching 4.69%.
“This report was the worst of both worlds – slower-than-expected growth and higher-than-expected inflation,” said David Donabedian, US chief investment officer at CIBC Private Wealth. “We are not far from having all interest rate cuts support investors' expectations. This forces (Fed Chairman Jerome) Powell to adopt a hawkish tone at the (Federal Open Market Committee) meeting next week.”
The report comes with markets on edge over the state of monetary policy and when the Federal Reserve will start cutting its benchmark interest rate. The federal funds rate, which sets what banks charge each other for overnight lending, is between 5.25% and 5.5%, the highest in about 23 years, although the central bank has not raised the rate since July 2023.
Investors have been forced to adjust their view on when the Fed will begin easing monetary policy as inflation remains high. The view expressed through futures trading is that interest rate cuts will begin in September, and the Fed is likely to cut only once or twice this year. Futures prices also changed following the GDP release, with traders now pointing to just one cut in 2024, according to CME Group calculations.
“The economy is likely to slow further in the following quarters, as consumers are likely nearing the end of their lavish spending,” said Jeffrey Roach, chief economist at LPL Financial. “Savings rates are falling as flat inflation puts greater pressure on the consumer. We should expect inflation to ease throughout this year as aggregate demand slows, although the path to the Fed's 2% target still looks elusive.”
Consumers have generally kept pace with inflation since it began rising, although higher inflation has eroded wage increases. The personal savings rate slowed in the first quarter to 3.6% from 4% in the fourth quarter. Income adjusted for taxes and inflation rose 1.1% over the period, down from 2%.
Spending patterns also changed in the quarter. Spending on goods fell 0.4%, largely due to a 1.2% decline in large purchases of long-lasting goods classified as durable goods. Spending on services increased by 4%, the highest quarterly level since the third quarter of 2021.
A thriving job market has helped support the economy. Initial jobless claims were 207,000 for the week ending April 20, down 5,000 and below estimates of 215,000, the Labor Department reported Thursday.
In a potentially positive sign for the housing market, residential investment rose by 13.9%, the largest increase since the fourth quarter of 2020.
Thursday's release was the first of three GDP tables the BEA is doing. Q1 readings could be subject to substantial revisions – in 2023, the initial Q1 reading was only a 1.1% increase, which was eventually raised to 2.2%.
