U.S. economic growth was much weaker than expected at the start of the year and prices rose at a faster pace, the Commerce Department said Thursday.
According to the department's Bureau of Economic Analysis, gross domestic product, a broad measure of the goods and services produced from January through March, rose 1.6% annually, adjusted for seasonality and inflation.
Economists consulted by Dow Jones expected an increase of 2.4%, after a gain 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% increase in the fourth quarter and below Wall Street's estimate of 3%. Fixed asset investment and government spending at the state and local level helped keep GDP positive this quarter, while a decline in private inventory investment and an increase in imports negatively affected it. Net exports subtracted 0.86 percentage points from the growth rate, while consumer spending contributed 1.68 percentage points.
There was also bad news on the inflation front.
The personal consumer expenditures price index, a key inflation variable for the Federal Reserve, rose an annualized 3.4% this quarter, the biggest gain in a year. 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 better indicator of long-term trends.
The GDP price index, also called the “chain-weighted” level, rose 3.1%, compared with the Dow Jones estimate of a 3% increase.
Markets slumped after the news, with futures tied to the Dow Jones Industrial Average falling more than 400 points. Government bond yields rose, with the 10-year benchmark recently at 4.69%.
The report has markets tense about the state of monetary policy and when the Federal Reserve will cut its benchmark interest rate. The federal funds rate, which determines what banks charge each other for overnight loans, is within a target range of between 5.25% and 5.5%, the highest in about 23 years, although the central bank has not since July 2023 more is increased.
Investors have had to adjust their view on when the Fed will start easing as inflation has remained high. The view expressed through futures trading is that rate cuts will begin in September, with the Fed likely to cut only once or twice this year. Futures prices have also shifted following the GDP release, with traders now pointing to just one cut in 2024.
“The economy is likely to slow further in coming quarters as consumers are likely nearing the end of their spending habits,” said Jeffrey Roach, chief economist at LPL Financial. “Savings rates are falling as persistent inflation puts greater pressure on consumers. We should expect inflation to ease this year as aggregate demand slows, although the path to the Fed's 2% target still seems far away.”
Consumers have generally kept up with inflation since it started rising, although rising inflation has eaten away at wage increases. The personal savings rate fell in the first quarter from 4% in the fourth quarter to 3.6%. Revenues adjusted for taxes and inflation rose by 1.1% over the period, up from 2%.
Spending patterns also changed this quarter. Spending on goods fell 0.4%, largely due to a 1.2% decline in higher volume purchases for long-lasting items. Spending on services rose 4%, the highest quarterly level since the third quarter of 2021.
A booming job market has helped support the economy. The Department of Labor reported Thursday that initial unemployment claims for the week of April 20 totaled 207,000, down 5,000 and below the estimate of 215,000.
In a potentially positive sign for the housing market, residential investment rose 13.9%, the largest increase since the fourth quarter of 2020.
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