NEW YORK (Reuters) – U.S. economic growth slowed more than expected in the first quarter, but a surprisingly high quarterly inflation component in consumer spending suggested the Federal Reserve would not cut interest rates before September.
Gross domestic product rose by 1.6% on an annual basis in the last quarter, the Ministry of Commerce said in its preliminary estimate on Thursday. Economists polled by Reuters had forecast GDP to rise 2.4%, after growing 3.4% in the fourth quarter. Since the end of 2022, the economy has defied predictions of doom after the Fed’s aggressive interest rate hike campaign aimed to curb inflation. Story
MARKET RESPONSE:
STOCKS: S&P 500 futures added to losses, falling 1.27%, pointing to a market decline at the Wall Street open
BONDS: 10-year U.S. Treasury yields rose to 4.721%; Two-year yields rose to 5.012% after the release
FOREX: The US dollar index strengthened by 0.113%
COMMENTS:
OLU SONOLA, Head of US Economic Research, FITCH
“This report comes with mixed messages. It is a downward trend in economic growth and it confirms the trend of accelerating inflation. Consumer spending wasn’t as strong as expected, but the downward trend in government spending is likely good news for the Fed.” Hot inflation pressures are the real story in this report. If growth continues to slowly slow but inflation rises sharply in the wrong direction again, the expectation of a Fed rate cut in 2024 appears increasingly out of reach. “
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“The economy continues to grow, but at a slower pace, and inflation is still stubborn. That just means the Fed is unlikely to cut rates in June and a big question mark for the rest of the year.”
“This is good and bad news for GDP because slower growth would normally mean a fall in the dollar and yields, but when the PCE price deflator kicks in on the higher side, that pushes yields higher.”
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC (sent via email)
“This report was the worst of both worlds: economic growth is slowing and inflationary pressures are continuing.”
“The Fed wants inflation to fall permanently, but the market wants economic growth and corporate profits to rise. So if neither moves in the right direction, that’s bad news for the markets.”
“We’re looking ahead to tomorrow’s PCE numbers as slowing inflation is the main concern for the Fed and the debate over rate cuts (or even rate hikes) is heating up, and that’s what’s causing so much uncertainty lately bond and stock markets.” “
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN “GDP growth was a miss, but the details were déjà vu again when it comes to consumer spending.” Services were up, but goods were down . Final sales to private domestic buyers rose 3.1% on an annual basis, meaning household domestic spending is still healthy despite the overall weakness. Unfortunately, it looks like spending on things like insurance and health care is starting to crowd out spending on other things.
The inflation figures were not encouraging. The renewed acceleration in services prices to 5.4% annualized is putting the Fed in some trouble. Growth is starting to stall while inflation has started to rise again. It is the toxic mix that central bankers fear most.”
KEVIN GORDON, SENIOR INVESTMENT STRATEGIST, SCHWAB, NEW YORK
“The market is probably focused on the hot inflation numbers in the report, which was definitely a surprise.”
“In some ways it is a confirmation of the data that has been circulating in recent months. “It is a combination of a much longer lag in service sector inflation and some upward pressure on commodity prices, which will eventually impact overall inflation as well.” Unfortunately, it is a cyclical upswing for parts of the raw materials world, but also just a very long disinflationary process. When the two come together, headline inflation is just starting to accelerate again.
“If you look at some of the meat and, you know, the meatier components, there’s still some resilience there. So broadly speaking, it’s still a resilient growing economy in the face of inflation taking longer to fall. That’s it.” “It’s a better mix than growth falling completely, but inflation impacts the Fed’s target.”
“It’s not like the Fed has eased rates yet. If it had already started cutting interest rates at that point, that would be worrying. The good news is that they stood firm.”
“Broadly speaking, it is still a resiliently growing economy in the face of inflation, which is still taking longer to fall.”
“What has pushed it down is net exports and inventories. If you take those out and just look at consumption and business investment, they would still look strong.”
STUART COLE, CHIEF MACROECONOMIST, EQUITI CAPITAL, LONDON
“The market is reacting more strongly to the PCE breach than to the weaker GDP number, and therefore stock futures are lower.”
“Interesting numbers for the Fed today. The weaker growth numbers, which if confirmed in subsequent revisions, should be welcomed as a sign in themselves that the US economy is finally starting to slow given the monetary tightening it has imposed. The Fed has delivered what in turn is expected to translate into lower demand for labor and downward pressure on wages. But the Fed will likely be more worried about the PCE numbers, which have once again delivered hot inflation readings and suggest that the battle to get the CPI back to target is far from won.”
“In many ways, the Fed is now in a bind. The growth figures suggest that monetary policy has had its effect and the Fed’s monetary policy brake can be relaxed somewhat. However, the inflation numbers suggest otherwise and may even indicate the need for further tightening. We know that the Fed’s main goal is to get the consumer price index back to target, and so today’s numbers are likely to drive a rate cut going forward.
(Compiled by the Global Finance & Markets Breaking News team)