The U.S. Commerce Department said Thursday that U.S. economic growth was much weaker than expected at the start of the year and that prices were rising faster.
According to the Department of Gross Domestic Product’s Bureau of Economic Analysis, GDP, a broad index of goods and services produced between January and March, rose 1.6% at an annual rate after adjusting for seasonality and inflation.
Economists surveyed by Dow Jones had expected economic growth of 2.4% in the fourth quarter of 2023, compared with growth of 3.4% and 4.9% in the previous quarter.
Consumer spending rose 2.5% in 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 a rise in imports had a negative impact. Net exports slowed growth by 0.86 percentage points, while consumer spending contributed 1.68 percentage points.
There is also some bad news on the inflation front.
The personal consumption price index, a key inflation variable for the Fed, rose at an annual rate of 3.4% in the quarter, the biggest increase in a year, up from 1.8% in the fourth quarter. Excluding food and energy, core PCE prices rose 3.7%, both above the Fed’s 2% target. Central bankers tend to focus on core inflation as a good indicator of longer-term trends.
The GDP price index (sometimes called the “weighted month-on-month” level) rose 3.1%, compared to the Dow Jones estimate of 3% growth.
Dow Jones Industrial Average futures plunged more than 400 points after the market news. US Treasury yields are trending higher, with the benchmark 10-year note yielding 4.69% recently.
“It’s the worst of both worlds – better-than-expected growth and higher inflation,” said David Donabedian, chief investment officer at CIBC Private Wealth US. Investors expect (Federal Reserve Chairman Jay J. Rohm Powell) to demur at next week’s (Federal Open Market Committee) meeting.”
The report comes as markets are nervous about the state of monetary policy and as the Federal Reserve is set to begin cutting its benchmark interest rates. The federal funds rate, which determines what banks charge for overnight loans between banks, targeted a range of 5.25%-5.5%, the highest level in nearly 23 years, although the central bank has not raised rates since July 2023.
With inflation still high, investors may need to adjust their views on when the Fed will start easing. The view expressed through futures trading is that rate cuts will begin in September and that the Fed could cut rates once or twice this year. Futures prices 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 slow further in the coming quarters as we expect inflation to slow this year as aggregate demand slows, although the path to the Fed’s 2% target still looks long,” said Jeffrey Roach, chief economist at LPL Financial.
Consumers generally tend to keep pace with inflation, even as rising inflation dwarfs wage growth. The personal savings rate fell to 3.6% in the first quarter from 4% in the fourth quarter. Revenues, adjusted for taxes and inflation, rose 1.1% over the same period, down from 2%.
Spending patterns also changed during the quarter. Product spending fell 0.4%, mainly due to a 1.2% decline in purchases of big-ticket durable items. Service spending rose 4%, the highest quarterly level since the third quarter of 2021.
An active labor market helps the economy. The U.S. Department of Labor reported Thursday that initial jobless claims totaled 207,000 in the week to April 20, down 5,000 and below the 215,000 estimate.
Residential investment rose 13.9%, the largest increase since the fourth quarter of 2020, which could be a positive sign for the housing market.
The data released Thursday is the first of three GDP tables released by the Bureau of Economic Analysis. The first quarter data may see a sharp correction – in 2023, the first quarter figure initially grew by only 1.1%, eventually reaching 2.2%.
