US Economy Suffered Lowest Growth Since First Half of 2022

A woman shops for groceries at a supermarket in Monterey Park, Calif., on Oct. 19, 2022. Frederic J. Brown/AFP via Getty Images

The U.S. economy slowed in the first three months of 2024 as the Federal Reserve’s lagged effect of high interest rates appears to be filtering throughout the economic landscape.

According to the Bureau of Economic Analysis’s second estimate, the real gross domestic product (GDP) growth rate in the first quarter was 1.3 percent. This is down from the federal agency’s advance estimate of 1.6 percent and in line with market estimates.

In the fourth quarter of 2023, the economy expanded by 3.4 percent.

It was the lowest growth since the GDP contractions in the first half of 2022.

Inflation eased slightly as the personal consumption expenditures (PCE) price index dipped to 3.3 percent from 3.4 percent. Core PCE, which omits the volatile food and energy components, slid to 3.6 percent from 3.7 percent.

The GDP price index, a gauge of inflation in prices for all goods and services produced in the United States, was unchanged at 3.1 percent.

Real (inflation-adjusted) disposable personal income was adjusted higher by 0.8 percentage points to 1.9 percent. The personal savings rate was also revised higher by 0.2 percentage points to 3.8 percent.

Consumer spending was adjusted lower to 2 percent from 2.5 percent. Goods spending contracted by 1.9 percent, while services consumption surged by 3.9 percent.

The consumer accounted for much of the growth in the January-to-March span.

Government spending was pushed higher by 0.1 percentage point to 1.3 percent. Federal, state, and local outlays contributed 18 percent to the final GDP tally.

Net exports of goods and services advanced by 1.2 percent, while gross private investment increased by 3.2 percent.

Market Reaction

The financial markets were little changed following the second GDP estimate, with the leading benchmark indexes down by as much as 0.8 percent before the opening bell.

U.S. Treasury yields were deep in the red on May 30. The benchmark 10-year yield slumped to 4.57 percent. The two-year yield fell below 4.94 percent, while the 30-year bond dropped toward 4.7 percent.

The U.S. dollar index, a measurement of the dollar against a basket of currencies, pared its gains and stayed below 105.

Reading the Economic Tea Leaves

Looking ahead to the second quarter, the U.S. economy is expected to put up better numbers. According to the Federal Reserve Bank of Atlanta’s GDPNow Model estimate, the April-to-June period is anticipated to grow at a 3.5 percent seasonally adjusted annualized rate.

The New York Fed Staff Nowcast shows more modest numbers, with second-quarter growth coming in at about 2 percent.

Opinions are mixed as to whether the economic landscape can sustain the momentum of the past couple of years.

Torsten Slok, Apollo’s chief economist, suggested that companies’ earnings growth in the S&P 500 show “a strong rebound in business fixed investment over the coming quarters.”

Findings in the Fed’s latest Beige Book, a monthly study of regional economies, highlight that the economy is likely to keep growing. Still, businesses are merely “cautiously optimistic” about economic conditions.

“National economic activity continued to expand. However, conditions varied across industries and districts,” the Fed stated in the report. “Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risk.”

The Dallas Fed’s Texas Manufacturing Outlook Survey reveals that manufacturing activity weakened in May as “perceptions of broader business conditions continued to worsen.”

Survey comments revealed that firms are worried about persistent inflation, the tight labor market, and elevated interest rates.

“Things are in a mess,” a transportation equipment manufacturing executive noted in the report.

Results from the RedBalloon–PublicSquare May Freedom Economy Index survey of 80,000 small business owners discovered that a majority (64 percent) believe that the country is headed into stagflation. This is a climate of stagnating growth and high inflation.

As other reports have emphasized, inflation remains a sticking point for companies. Price pressures are so high for many firms that 40 percent of small business owners are delaying paying bills to manage their cash flows.

“It’s been a difficult 3 years for America’s small businesses,” Michael Seifert, CEO of popular marketplace platform PublicSquare, said in a statement. “While many inside the Beltway may feel like things are good, that isn’t translating to Main Street America—the frontlines of our small business economy.”

But while small businesses have become less ebullient about the economy, consumers turned slightly more confident.

The Conference Board’s Consumer Confidence Index rose in May following three straight months of declines.

“Looking ahead, fewer consumers expected deterioration in future business conditions, job availability, and income, resulting in an increase in the Expectation Index,” Dana Peterson, chief economist at The Conference Board, said in the report. “Nonetheless, the overall confidence gauge remained within the relatively narrow range it has been hovering in for more than two years.”

That said, the average 12-month inflation outlook ticked up to 5.4 percent from 5.3 percent.

“The survey also revealed a possible resurgence in recession concerns. The ‘Perceived Likelihood of a U.S. Recession over the Next 12 Months’ rose again in May, with more consumers believing recession is ‘somewhat likely’ or ‘very likely,’” Ms. Peterson said.

The next major economic report will be the Fed’s preferred PCE price index, which is expected to be unchanged at 2.7 percent.

Other Data

Market observers also combed through the latest labor data.

Initial jobless claims rose to 219,000 for the week ended May 25. Continuing jobless claims swelled to 1.791 million, while the four-week average, which strips the week-to-week volatility, edged up to 222,500.

Wholesale inventories rose at a higher-than-expected pace of 0.2 percent in April, while retail inventories ex automobiles climbed by 0.3 percent.

The goods trade balance deficit fell to $99.41 billion, higher than the consensus forecast of $91.8 billion.