GDP growth slowed to a 1.6% rate in the first quarter, well below expectations

U.S.
economic
growth
was
much
weaker
than
expected
to
start
the
year,
and
prices
rose
at
a
faster
pace,
the
Commerce
Department
reported
Thursday.

Gross
domestic
product,
a
broad
measure
of
goods
and
services
produced
in
the
January-through-March
period,
increased
at
a
1.6%
annualized
pace
when
adjusted
for
seasonality
and
inflation,
according
to
the
department’s
Bureau
of
Economic
Analysis.

Economists
surveyed
by
Dow
Jones
had
been
looking
for
an
increase
of
2.4%
following
a
3.4%
gain
in
the
fourth
quarter
of
2023
and
4.9%
in
the
previous
period.

Consumer
spending
increased
2.5%
in
the
period,
down
from
a
3.3%
gain
in
the
fourth
quarter
and
below
the
3%
Wall
Street
estimate.
Fixed
investment
and
government
spending
at
the
state
and
local
level
helped
keep
GDP
positive
on
the
quarter,
while
a
decline
in
private
inventory
investment
and
an
increase
in
imports
subtracted.
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
Federal
Reserve,
rose
at
a
3.4%
annualized
pace
for
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
at
a
3.7%
rate,
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 “chain-weighted”
level,
increased
at
a
3.1%
rate,
compared
to
the
Dow
Jones
estimate
for
a
3%
increase.

Markets

slumped
following
the
news,
with
futures
tied
to
the
Dow
Jones
Industrial
Average
off
more
than
400
points.
Treasury
yields
moved
higher,
with
the
benchmark
10-year
note
most
recently
at
4.69%.

“This
was
a
worst
of
both
worlds
report
–
slower
than
expected
growth,
higher
than
expected
inflation,”
said
David
Donabedian,
chief
investment
officer
of
CIBC
Private
Wealth
US. “We
are
not
far
from
all
rate
cuts
being
backed
out
of
investor
expectations.
It
forces
[Fed
Chair
Jerome]
Powell
into
a
hawkish
tone
for
next
week’s
[Federal
Open
Market
Committee]
meeting.”

The
report
comes
with
markets
on
edge
about
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
in
a
targeted
range
between
5.25%
to
5.5%,
the
highest
in
some
23
years
though
the
central
bank
has
not
hiked
since
July
2023.

Investors
have
had
to
adjust
their
view
of
when
the
Fed
will
start
easing
as
inflation
has
remained
elevated.
The
view
as
expressed
through
futures
trading
is
that
rate
reductions
will
begin
in
September,
with
the
Fed
likely
to
cut
just
one
or
two
times
this
year.
Futures
pricing
also
shifted
after
the
GDP
release,
with
traders
now
pointing
to
just
one
cut
in
2024,
according
to
CME
Group
calculations.

“The
economy
will
likely
decelerate
further
in
the
following
quarters
as
consumers
are
likely
near
the
end
of
their
spending
splurge,”
said
Jeffrey
Roach,
chief
economist
at
LPL
Financial. “Savings
rates
are
falling
as
sticky
inflation
puts
greater
pressure
on
the
consumer.
We
should
expect
inflation
will
ease
throughout
this
year
as
aggregate
demand
slows,
although
the
path
to
the
Fed’s
2%
target
still
looks
a
long
ways
off.”

Consumers
generally
have
kept
up
with
inflation
since
it
began
spiking,
though
rising
inflation
has
eaten
into
pay
increases.
The
personal
savings
rate
decelerated
in
the
first
quarter
to
3.6%
from
4%
in
the
fourth
quarter.
Income
adjusted
for
taxes
and
inflation
rose
1.1%
for
the
period,
down
from
2%.

Spending
patterns
also
shifted
in
the
quarter.
Spending
on
goods
declined
0.4%,
in
large
part
to
a
1.2%
slide
in
bigger-ticket
purchases
for
long-lasting
items
classified
as
durable
goods.
Services
spending
increased
4%,
its
highest
quarterly
level
since
the
third
quarter
of
2021.

A
buoyant
labor
market
has
helped
underpin
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
housing
market,
residential
investment
surged
13.9%,
its
largest
increase
since
the
fourth
quarter
of
2020.

Thursday’s
release
was
the
first
of
three
tabulations
the
BEA
does
for
GDP.
First-quarter
readings
can
be
subject
to
substantial
revisions
—
in
2023,
the
initial
Q1
reading
was
an
increase
of
just
1.1%,
which
ultimately
was
taken
up
to
2.2%.