The U.S. economy grew at the slowest pace in nearly two years in Q1 of 2024 with gross domestic product (GDP) data revealing a 1.6 percent annual growth, the slowest pace of growth since the second quarter of 2022, the U.S. Department of Commerce reported. Price pressures increased at the fastest rate so far this year with a 3.1 percent jump after rising by 1.9 percent in Q4 of 2023. Excluding food and energy, the personal consumption expenditures (PCE) price index surged at a 3.7 percent rate after seeing a 2 percent increase in Q4 of 2023.
The strong PCE readings pose a risk to March PCE inflation data due Friday. However, markets are closely watching the January and February data revisions for more insights on inflation.
The slow economic growth comes amid a surge in imports and a small build-up of unsold goods at businesses. Hence, rising inflation and solid demand reinforce market expectations that the Federal Reserve will not cut interest rates before September.
The commerce department’s first-quarter GDP data also reflected a decline in government spending, which contributed to the moderation in the U.S. economy. However, domestic demand remained strong as consumer spending moderated slightly. Meanwhile, business investment increased and the housing market recovery picked up.
Interest rates to remain unchanged
Trade and inventories are the most volatile components of the U.S. economy. In light of the recent data, markets expect the Federal Reserve to leave interest rates unchanged at the policy meeting next week. With inflation remaining resilient, the central bank will likely wait longer to cut rates.
Labor market tightens
Despite economic moderation, the labor market remains robust. The U.S. Department of Labor revealed that unemployment benefits fell 5,000 to 207,000 in the week ending April 20 in its weekly jobless claims report. Moreover, the number of people receiving benefits, which is an indicator for hiring, declined 15,000 to 1.781 million during the week ending April 13. In addition, continuing claims declined between March and April, indicating that the unemployment rate was likely stable after declining to 3.8 percent last month from 3.9 percent in February. Low layoffs have sustained high wages, supporting consumer spending, a vital component of the U.S. economy.
Read: U.K. retail sales slide to lowest since 2020 in April
Trade deficit increases
Inventories rose at a slower pace in Q1 at a $35.4 billion rate after increasing at a $54.9 billion pace in the fourth quarter of 2023. This impacted the U.S. economy, subtracting 0.35 percentage points from GDP growth. This also led to an increase in imports, which resulted in the trade deficit widening to $973.2 billion from $918.5 billion in the fourth quarter. Therefore, trade subtracted 0.86 percentage points from the U.S. GDP growth.
Meanwhile, investment in nonresidential real estate declined for the first time in over a year. However, residential investment recorded its fastest pace of growth since the fourth quarter of 2020. Despite higher mortgage rates, home sales and construction increased.
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