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 reported Thursday.
Gross domestic product, a broad measure of goods and services produced between January and March, grew at an annualized rate of 1.6% after adjusting for seasonality and inflation, according to the department’s Bureau of Economic Analysis.
Economists surveyed by Dow Jones had forecast a 2.4% rise after a 3.4% gain in the fourth quarter of 2023 and 4.9% in the previous period.
Consumer spending rose 2.5% in the period, down from the 3.3% gain in the fourth quarter and Wall Street’s 3% estimate. Fixed investment and government spending at the national and local level helped keep GDP positive in the quarter, while a decline in private inventory investment and an increase in imports offset the effect. 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 consumption expenditures price index, a key inflation variable for the Federal Reserve, rose at an annualized rate of 3.4% for the quarter, its largest increase in a year. Excluding food and energy, core PCE prices rose at a rate of 3.7%, both well above the Fed’s 2% target. Central bank officials tend to view core inflation as a better indicator of long-term trends.
The GDP price index, sometimes called the “chain-weighted” level, increased at a rate of 3.1%, compared to the Dow Jones estimate for a 3% increase.
Markets crashed on this news, with futures linked to the Dow Jones Industrial Average losing more than 400 points. Treasury yields have been rising, with the benchmark 10-year security recently settling at 4.69%.
The report comes as markets are concerned about the state of monetary policy and when the Federal Reserve will begin cutting its benchmark interest rate. The federal funds rate, which sets what banks charge each other for overnight loans, is within a target range of 5.25% to 5.5%, the highest in 23 years, although the central bank has not increased since July 2023.
Investors had to revise their view of when the Fed would begin to ease its measures as inflation remained high. The view in futures trading is that rate cuts will begin in September, with the Fed likely cutting them only once or twice this year. Futures prices also changed after the GDP release, with traders now pointing to just one decline in 2024, according to CME Group calculations.
“The economy will likely slow further in subsequent quarters as consumers are likely about to end their spending sprees,” said Jeffrey Roach, chief economist at LPL Financial. “Savings rates are falling as persistent inflation puts increased pressure on the consumer. We should expect inflation to slow throughout this year as aggregate demand slows, although the path to the Fed’s 2% target still seems far away.”
Consumers have generally followed inflation since it began soaring, even as rising inflation has eaten into wage increases. The personal savings rate slowed in the first quarter, falling to 3.6% from 4% in the fourth quarter. Income adjusted for taxes and inflation rose 1.1% over the period, up from 2% previously.
Spending habits also changed during the quarter. Spending on goods fell 0.4%, largely due to a 1.2% decline in more expensive purchases of long-lasting items. Spending on services increased 4%, its highest quarterly level since the third quarter of 2021.
A dynamic labor market has helped support the economy. The Labor Department reported Thursday that initial jobless claims stood at 207,000 for the week of April 20, down 5,000 and below the estimate of 215,000.
Perhaps a positive sign for the real estate market, residential investment jumped 13.9%, its largest increase since the fourth quarter of 2020.
Thursday’s release was the first of three tables produced by the BEA for GDP. The first quarter figures may be subject to substantial revisions: in 2023, the initial first quarter figure was an increase of just 1.1%, which was eventually increased to 2.2%.
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