Soft First-Quarter GDP Growth of 1.4% May Signal a Potential Pickup in the Economy

The U.S. economy experienced a slow 1.4% GDP growth in the first quarter, a slight improvement from the initially reported 1.3%. Although this is the weakest growth in nearly two years, there are indications of a potential rebound in the second quarter. Market expectations point to a stronger 2% growth, contingent on the Federal Reserve's decision to lower interest rates to combat inflation, which has kept rates at a 23-year high.

The US economy started the year on a weaker note than initially anticipated, with Gross Domestic Product (GDP) growth decelerating to 1.4% in the first quarter [1]. This figure represents a slight improvement from the previously reported 1.3% but marks the weakest growth in nearly two years.

Despite the subpar performance, there are indications of a potential rebound in the second quarter, with market expectations pointing to a stronger 2% growth [2]. This optimistic outlook is largely contingent on the Federal Reserve's decision to lower interest rates to combat inflation, which has kept rates at a 23-year high.

The slowdown in growth during the first quarter can be attributed to several factors, including weak consumer spending and a decrease in business inventories. Personal spending, the primary driver of economic growth, increased at a slower pace of 2.0% compared to the previous estimate of 2.5% [1]. Meanwhile, a decrease in business inventories subtracted nearly half a percentage point from the quarter's growth rate [2].

Consumer spending, which accounts for approximately 70% of the US economy, was also impacted by softening demand for goods, particularly cars [1]. The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, rose at a slightly lower annualized rate of 3.3% in the first quarter compared to the initial projection [1].

The current economic environment presents a unique challenge for the Federal Reserve as it navigates the need to balance fighting inflation with supporting growth. While the slowdown in growth during the first quarter may be temporary, the persistence of high inflation continues to pose a significant threat to the economic recovery.

References:

[1] Bloomberg. (2024, May 30). US GDP grew at softer pace as spending, inflation marked down. https://www.bloomberg.com/news/articles/2024-05-30/us-gdp-grew-at-softer-pace-as-spending-inflation-marked-down

[2] Associated Press. (2024, May 25). US economy grew at 1.3% annual pace in first quarter, down from initial estimate. https://apnews.com/article/economy-growth-inflation-gdp-consumers-federal-reserve-a6c0086a4a55111c38939bf6cfa0db79