The US economy performed below expectations in the first quarter of 2024 while inflation also increased, according to the latest figures from the US Bureau of Economic Analysis (BEA).
Real Gross Domestic Product (GDP) expanded 1.6% on an annual basis in the quarter, falling short of consensus expectations of 2.4%.
It represented the slowest quarterly growth rate in almost two years.
The BEA said that deceleration in real GDP compared to the 3.4% growth in Q4 2023 primarily reflected decelerations in consumer spending, exports, and state and local government spending and a downturn in federal government spending.
Meanwhile, the core personal consumption expenditures price index, the Fed’s preferred measure of inflation, came in 30 basis points above expectations at 3.7%.
Looking ahead to the next Federal Open Markets Committee meeting next week, Hargreaves Lansdown’s head of money and markets Susannah Streeter said: “Even though the engine of growth is whirring more slowly than expected, it’s not yet prompting a major rethink about earlier interest rate cuts. Inflation is still proving sticky, which is set to keep the Fed in a jam, cautious about bringing rate cuts in too soon.
“On an annual basis in the first quarter, there was a larger than forecast increase in core personal consumption expenditure prices, which came in at 3.7%. ‘Higher for longer’ is still set to stay the mantra of US central bankers, despite the gears of the world’s largest economy shifting down.’’
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Nathaniel Casey, investment strategist at wealth management firm Evelyn Partners, added: “Despite the rapid hiking of interest rates we’ve seen, the unemployment rate remains low and initial jobless claims are also subdued with a figure of 210k reported in the final week of Q1, far lower than the long-term average of 365k. While the labour market remains near full employment, households have the ability and willingness to spend, supporting the economy.
“In recent months markets have reined in their rate cut expectations for 2024. At the start of the year markets had priced in at least six 25 basis point rate cuts, commencing from March – considerably more optimistic than the three cuts indicated by the FOMCs recent guidance. However, following three consecutive 0.4% monthly increases to Core CPI this year, markets have dampened their expectations, with less than two cuts now priced in for this year.”
Richard Flynn, managing director at Charles Schwab UK, argues that today’s economic figures suggest that spectators may have jumped the gun with positive expectations.
“Looking ahead, we might expect to see these figures temper the bullish narrative that pushed the market to record highs in the first few months of this year. But for inflation, today’s report may be a more positive signal,” he said.
“High levels of economic activity also keep inflation elevated and to cut interest rates, the Fed is awaiting substantial evidence that inflation is trending lower. While today’s report might not be the full story that the Fed is looking for, it may be the prequel.”
