By Lucia Mutikani
WASHINGTON (Reuters) – U.S. economic growth likely slowed to a still-solid pace in the first quarter while inflation accelerated, bolstering financial market expectations that the Federal Reserve would delay a rate cut until September.
A snapshot of first-quarter gross domestic product released by the Commerce Department on Thursday is expected to show that consumers are still doing most of the work for the economy thanks to a robust labor market. Since late 2022, the economy has defied predictions of doom after the Federal Reserve launched an aggressive campaign of interest rate hikes to curb inflation.
The United States outperforms other advanced economies. Economists say consumers locked in to lower mortgage rates while companies refinanced their debt before the tightening cycle began. Companies are also stockpiling labor after struggling to find workers during and after the COVID-19 pandemic and are enjoying higher profit growth due to strong pricing power.
“They were relatively spared from the rate hikes,” said Richard de Chazal, macro analyst at William Blair. “In previous economic cycles, companies in the U.S. were very quick to lay off workers at the first sign of a slowdown, and then they knew they could rehire them very quickly once the cycle turned.”
Gross domestic product likely rose 2.4% on an annual basis last quarter, according to a Reuters poll of economists. Estimates ranged from a pace of 1.0% to 3.1%. The economy grew 3.4% in the fourth quarter.
It is growing at a rate above what Fed officials consider a noninflationary growth rate of 1.8%. The International Monetary Fund last week raised its forecast for U.S. growth in 2024 to 2.7% from the 2.1% predicted in January, citing stronger-than-expected employment and consumer spending.
In the first quarter, job gains averaged 276,000 per month, compared with an average of 212,000 in the October-December quarter.
The labor market’s resilience will likely be underscored by the Labor Department’s weekly jobless claims report, which is expected to show a 3,000 increase in initial jobless claims to a seasonally adjusted 215,000 in the week ending April 20. The range this year is between 194,000 and 225,000.
The low layoffs are fueling high wage growth and supporting consumer spending, which accounts for more than two-thirds of economic activity.
Although inflation likely rose sharply and the personal consumption expenditures (PCE) price index excluding food and energy was expected to rise 3.4% after rising 2.0% in the fourth quarter, economists were not worried about a Resurgence of price pressure.
PRICES CONTINUE TO BE EXPECTED
The so-called core PCE price index is one of the inflation indicators that the Fed tracks for its 2 percent target. The central bank has kept its key interest rate in the range of 5.25% to 5.50% since July. It has raised the key interest rate for overnight money by 525 basis points since March 2022.
James Knightley, chief international economist at ING, said sustained inflation would require higher wages, which would give consumers more purchasing power and allow companies to raise prices… “What we are seeing, however, is that demand for labor is improving and significantly weaken cost indicators.” “
“There appears to be no risk of wage growth accelerating and inflation remaining high for longer.”
Economists expect consumer spending more or less maintained the fourth quarter’s 3.3% growth pace, also due to higher stock market prices.
However, they fear that lower-income households have depleted their savings due to the pandemic and are largely relying on debt to finance their purchases. Recent data and comments from bank executives suggested that lower-income borrowers were increasingly struggling to keep up with their loan payments.
The economy is also likely to have been supported by the real estate market, with double-digit growth in residential investment expected as there is a significant shortage of condominiums for sale, encouraging the construction and sales of new single-family homes. Corporate spending on intellectual property may have seen a boost as companies invest in artificial intelligence.
Although nonresidential investment continued to increase, the pace is likely to have slowed sharply compared to last year as companies took advantage of President Joe Biden’s administration’s moves to bring semiconductor manufacturing output back to the United States by building factories .
Trade likely detracted from GDP growth as some of the increase in consumer spending was covered by imports.
Another negative factor may have been corporate spending on equipment, which fell for the third quarter in a row. That, along with weakness in sentiment surveys, has led some economists to say the economy is probably not as strong as GDP and labor market data portrays and to expect growth to slow.
But others cautioned against reading too much into the divergence between the so-called hard data and sentiment surveys, arguing that the pandemic has made it difficult to get a clear signal from the polls. They also argued that companies are inherently conservative.
“These (survey) metrics have not yet normalized relative to the reality of the economy,” said Brian Bethune, an economics professor at Boston College. “Companies are seeing that things are going a little better than expected, and that’s the most important thing for them.”
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)