U.S. Economic Growth Slows to 1.6%, Inflation Stays Firm

The U.S. economy continued its growth trajectory in the first quarter, although at a slightly slower pace, while persistently high inflation rates have dampened hopes for imminent interest rate cuts by the Federal Reserve.

According to the Commerce Department’s report released Thursday, gross domestic product (GDP) expanded at a 1.6% seasonally- and inflation-adjusted annual rate in the first quarter, marking a deceleration from the rapid pace observed last year. This figure fell short of the 2.4% projected by economists surveyed by The Wall Street Journal.

Despite the ongoing economic expansion, attention has been drawn to inflation data, which has exceeded expectations and underscored the significant price pressures facing consumers across various sectors of the economy.

The persistently high inflation rates prompted a sell-off in bonds, leading to an increase in yields on the 10-year Treasury note to above 4.7% for the first time this year. Concurrently, U.S. stocks experienced a decline, with the Dow Jones Industrial Average dropping over 600 points during morning trading.

However, the report also indicated that American consumers remain resilient, supported by years of robust hiring and wage growth. Expenditure on healthcare, insurance, and other services continued to rise, reflecting the ongoing strength of underlying consumer demand.

Eugenio Alemán, chief economist at investment firm Raymond James, remarked, “The domestic economy is performing well, albeit with prices slightly elevated.”

A slowdown in spending on goods such as automobiles and gasoline weighed down overall growth, while shifts in business inventories and international trade also contributed to the moderation in expansion last quarter. Nonetheless, economists cautioned against reading too much into these fluctuations, noting that such figures can vary significantly throughout the year.

Teresa Ghilarducci, an economics professor at the New School for Social Research in New York City, commented, “A decrease in inventories can be positive news for the economy, signaling potential for increased investment in the next quarter.”

However, Thursday’s report also suggests that inflation, as measured by the Fed’s preferred gauge, may have been stronger than anticipated in March, with economists already revising their expectations for price pressures upward following an earlier inflation report this month.

Excluding volatile food and energy prices, the personal-consumption expenditures price index rose 3.7% in the first quarter at an annualized rate, surpassing expectations of a 3.4% increase. This implies that price pressures remained significant in March, raising the possibility of upward revisions to inflation readings for January and February when the Commerce Department releases its March inflation figures.

This latest snapshot follows a series of federal data releases in recent weeks, which indicated that the U.S. economy continues to perform strongly despite facing the highest interest rates in 23 years. So far in 2024, employers across the country have been hiring at rates exceeding Wall Street’s projections, while an influx of immigrants has bolstered growth and tax revenues.

Optimism has also been evident among businesses, with earnings season underway and companies such as GM and Lockheed Martin reporting strong performance driven by robust demand and ongoing investment. Nevertheless, the sustained economic growth has been accompanied by persistent price pressures, raising concerns that inflation may settle closer to 3% rather than the Federal Reserve’s target of 2%.

The plateauing of inflation in recent months has posed a challenge for President Biden in an election year, while investors’ expectations of rate cuts have been dashed, particularly impacting tech stocks. However, signs of a cooling economy have emerged, including reduced savings among low-income Americans and a decline in home sales amidst rising mortgage rates.

Many economists anticipate that these challenges will intensify, potentially leading to a slowdown in inflation if and when the labor market loosens.