The U.S. economy experienced its slowest growth in the first quarter of 2024, with GDP expanding by only 1.6 percent. This is a significant decline from the 3.4 percent growth seen in the previous quarter and fell short of the consensus estimate of 2.5 percent. The slowdown can be attributed to several factors, including inflation pressures and higher borrowing costs.
Consumer spending, which had contributed to nearly all of the growth in the previous quarter, eased to 2.5 percent in the first quarter. Government spending also slowed to 1.2 percent, with federal, state, and local spending accounting for 13 percent of the expansion. Price pressures were evident throughout the data, with personal consumption expenditure (PCE) prices rising to 3.4 percent and core PCE climbing to 3.7 percent.
Looking ahead to the second quarter, the Federal Reserve Bank of New York Staff Nowcast predicts a 2.7 percent GDP reading. However, the financial markets reacted negatively to the weaker-than-expected GDP data, with benchmark indexes tumbling by as much as 1.2 percent. U.S. Treasury yields also rose, with the benchmark 10-year yield reaching 4.7 percent.
Investors are particularly focused on the personal consumption expenditure (PCE) price index, which is the Fed’s preferred inflation measure. It is projected to climb to 2.6 percent, while core PCE is expected to slow to the same rate. These inflation metrics have implications for interest rates, as higher inflation could lead to a delay in rate cuts and potentially result in more restrictive monetary policy.
Federal Reserve Chair Jerome Powell has acknowledged that elevated inflation readings may delay rate cuts until later in the year. The futures market anticipates the first rate cut in September, with traders pricing in only two rate cuts for the year instead of the initial expectation of six.
While the U.S. economy has shown resilience in the face of high borrowing costs and tight credit conditions, there are concerns about the potential impact of the current restrictive stance. Experts worry that businesses and consumers with significant debt levels could be negatively affected, as well as banks with exposure to commercial real estate and consumer loans. The Fed’s report also highlights the potential strain on foreign economies, particularly emerging markets, which could have implications for the U.S. through strains in dollar funding markets and reduced credit from foreign lenders.
Despite these concerns, the economy has surprised economic observers with solid growth and labor market trends. Many banks and economists have abandoned their recession calls and are now forecasting tepid growth prospects. The next Federal Open Market Committee meeting is scheduled for April 30 and May 1, where policymakers will discuss the current economic situation and potential policy adjustments.
