US Economic Growth Slows to 1.6 Percent in 1st Quarter, Lowest Since 2022

Sales advertisement at a shop in the Fashion Centre at Pentagon City shopping mall in Arlington, Va., on Jan 3, 2024. Madalina Vasiliu/The Epoch Times

The U.S. economy showed signs of slowing in the first quarter as inflation pressures and higher borrowing costs weighed on the country to kick off 2024.

According to the Bureau of Economic Analysis (BEA), the U.S. economy expanded by 1.6 percent in the first three months of the year, down from 3.4 percent in the fourth quarter. The reading fell short of the consensus estimate of 2.5 percent.

The gross domestic product (GDP) is a broad measure of goods and services produced in the United States. The nation has not experienced two consecutive quarters of contracting GDP since the first half of 2022.

Consumer spending eased to 2.5 percent in the first quarter. It contributed to nearly all of the growth in the first quarter.

Government spending slowed to 1.2 percent, with all of it coming from the state and local levels. In fact, federal spending dipped for the first time in two years.

Federal, state, and local spending accounted for 13 percent of the first-quarter expansion.

Price pressures were apparent throughout the GDP data. Personal consumption expenditure (PCE) prices rose to 3.4 percent, up from 1.8 percent. Core PCE, which strips the volatile food and energy components, climbed to 3.7 percent, up from 2 percent. This also topped the market forecast of 3.4 percent.

The GDP Price index, a gauge of changes in prices for goods and services purchased by businesses and consumers, edged up to 3.1 percent, up from 1.7 percent in the October 2023 to December 2023 span. This was slightly above the market forecast of 3 percent.

Net exports of goods and services jumped 0.9 percent, while gross private domestic investment surged 3.2 percent.

The personal savings rate was 3.6 percent, down from 4 percent. Real (inflation-adjusted) disposable personal income advanced 1.1 percent, down from 2 percent.

Looking ahead to the second quarter, the Federal Reserve Bank of New York Staff Nowcast anticipated a 2.7 percent GDP reading.

Market Reaction

The financial markets were in the red before the opening bell, with the leading benchmark indexes tumbling as much as 1.6 percent.

U.S. Treasury yields popped following the downbeat GDP data. The benchmark 10-year yield rose to 4.7 percent. The two-year yield eyed 5 percent, while the 30-year bond firmed above 4.8 percent.

The U.S. Dollar Index, a measurement of the greenback against a basket of currencies, turned positive and eyed 106.00.

Other Economic Data

Financial markets also combed through other economic data on April 25.

The goods trade deficit was unchanged at $91.83 billion and came in slightly higher than economists’ expectations of $91.2 billion.

Initial jobless claims fell to 207,000 for the week ending April 20. Continuing jobless claims also slipped to 1.781 million.

Wholesale inventories declined 0.4 percent. Retail inventories excluding automobiles also slid 0.1 percent.

Interest Rates and Inflation

But while the quarterly snapshot of the U.S. economy is typically vital news for the financial markets, all eyes will be on the PCE price index.

The Fed’s preferred inflation measurement, scheduled for release on April 26, is projected to climb to 2.6 percent, according to the Philadelphia Fed’s Inflation Nowcasting model. Core PCE, which strips the volatile energy and food components, is forecast to slow to 2.6 percent.

Investors are paying extra attention to the PCE because of its impact on interest rates.

With various inflation metrics trending in the wrong direction, monetary policymakers are making a case for being patient before cutting rates, effectively keeping them higher for longer. As the economy inches closer to the soft-landing scenario, Fed officials assert that they can afford to not urgently pivot on the central bank’s restrictive stance.

Federal Reserve Bank Chair Jerome Powell speaks during the Stanford Business, Government, and Society Forum at Stanford University in Stanford, Calif., on April 3, 2024. Justin Sullivan/Getty Images

Speaking at a panel discussion last week, Fed Chair Jerome Powell conceded that the elevated inflation readings will likely delay rate cuts until later this year.

“If higher inflation does persist,” he said, “we can maintain the current level for as long as needed.”

According to the CME Fed Watch Tool, the futures market anticipates the first rate cut in September. Traders are pricing in only two rate cuts this year, down from the six expected heading into 2024.

Although the U.S. economy has weathered a high-rate climate, a number of economists and market watchers warn that the heightened restrictive stance could eventually break something.

In its semi-annual report on financial stability, the Fed warned that higher-than-expected interest rates are a substantial risk for the United States and global financial systems.

The benchmark federal funds rate is currently in the range of 5.25 percent to 5.5 percent. Since monetary policy functions with a lag, the 23-year-high rates are still traveling throughout the economic landscape. Experts are concerned that this could weigh on business and consumer balance sheets, particularly for those with immense debt levels. Banks possessing enormous exposure to commercial real estate and consumer loans could suffer significant losses, resulting in tighter financial conditions.

“Inflation could persist for longer than expected, which could result in more restrictive monetary policy, heightened volatility in financial markets, and corrections in asset prices,” the Fed report reads, noting that foreign economies could also endure considerable strain, particularly emerging markets.

“This stress could transmit to the U.S. through strains in dollar funding markets, rapid rebalancing of portfolios, and reduced credit from foreign lenders to U.S. borrowers.”

Ever since the Fed signaled three rate cuts in December 2023, financial conditions have loosened. The Chicago Fed’s weekly National Financial Conditions Index has showcased looser-than-average financial conditions the entire year.

In the meantime, economic observers have been surprised by solid growth and labor market trends amid above-trend inflation and sky-high interest rates. Many banks and economists have abandoned their recession calls, forecasting tepid growth prospects as their base case.

“The U.S. economy continues to show remarkable resilience in the face of high borrowing costs, tight credit conditions, and a weak external backdrop,” James Knightley, chief international economist at ING, wrote in a note. “We now think a third quarter start point for Fed easing, either in July or, more likely, September, looks like a more credible call than June.”

The next two-day policymaking Federal Open Market Committee meeting will occur on April 30 and May 1.