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US economic growth disappoints

In the wake of the weaker-than-expected first estimate of US economic growth, it seems US interest rates aren’t going lower for a while longer—perhaps past November’s elections—unless there is a sudden slump in activity between now and then.

US GDP rose at an annual 1.6%, slower than the forecasted 2.5% estimate and less than half the 3.4% annual rate at the end of 2023. It was also short of the 2.1% estimate from the Fed at its last meeting, which was raised from a 1.4% estimate at the end of 2023.

The price data in the GDP report suggested that there are continuing upward pressures, but that was clearly evident from the consumer and producer price data released for January, February, and March.

Friday sees the release of the final price data for the quarter with the personal consumption expenditure figures where the core price data is closely watched by the Fed. That is expected to show inflation remaining ‘sticky.’

But it is important to note that the big influences on GDP growth in the quarter were volatile measures, and one—imports—actually supports the belief that economic growth is much stronger than the figures showed.

The biggest economic drag last quarter was the rise in imports. That suggests strong domestic demand for goods, but imports subtract from growth. That category alone subtracted 0.96 percentage points from the headline figure.

The other category was stocks, or inventories (a rise can drive GDP higher, a fall can see GDP growth slow). In the March quarter, companies also shed inventories at a rapid rate, with another 0.35 percentage point drag from that category.

But that category is more noise than signal: It is volatile quarter to quarter and is usually followed a quarter or two later by a big rise as companies replenish their stocks.

And key indicators of the underlying US economic activity were steady in the new report, despite the easing in the rate of overall GDP growth.

Economists pointed to the key final domestic private sector sales measure, which grew at a 3.1% annual rate in the March quarter, slowing only slightly from 3.3% in the three months to December.

Consumer spending increased at a 2.5% annual rate in the quarter—down from 3.3% in the fourth quarter of 2023.

And the big surprise—the rebound underway in housing—even though mortgage rates topped 7% in the quarter.

Economists said residential investment soared at a 14% annual rate in the quarter, a big jump from the 2.8% in the prior quarter.

So while the slowing in headline growth might prompt speculation of a rate cut, the strong performance in underlying data, the continuing higher-than-wanted price pressures, all suggest the US central bank won’t be moving to change the Federal Funds Rate anytime soon.

“This report comes in with mixed messages,” said Olu Sonola, head of economic research at Fitch. “If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach.”