The U.S. economy grew at its slowest pace in nearly two years in the first quarter amid a surge in imports and small build-up of unsold goods at businesses, signs of solid demand that together with an acceleration in inflation reinforced expectations the Federal Reserve would not cut interest rates before September.
The cooler-than-expected growth reported by the Commerce Department in its snapshot of first-quarter gross domestic product on Thursday, which also reflected a downshift in government spending, exaggerated the moderation in economic activity. Domestic demand, a better growth measure, was strong as consumer spending moderated slightly while business investment picked up and the housing recovery gained steam.
Trade and inventories are the most volatile GDP components, and are often subject to revision when the government updates its growth estimates. Fed officials are expected to leave rates unchanged at the U.S. central bank's policy meeting next week.
"The Fed will likely see the GDP report as solid, while the upward surprise to inflation will support the central bank's case for waiting longer before cutting rates," said Daniel Vernazza, chief international economist at UniCredit.
GDP increased at a 1.6% annualized rate last quarter, the slowest pace since the second quarter of 2022, the Commerce Department's Bureau of Economic Analysis said. Economists polled by Reuters had forecast GDP would rise at a 2.4% rate, with estimates ranging from a 1.0% pace to a 3.1% rate.
The economy grew at a 3.4% rate in the fourth quarter. The first-quarter growth pace was below what U.S. central bank officials regard as the non-inflationary growth rate of 1.8%.
Excluding inventories, government spending and trade, the economy grew at a 3.1% rate after expanding at a 3.3% rate in the fourth quarter. That also dispels the notion that government spending was fueling the economy.
The U.S. economy, which has outperformed the economies of other advanced nations, is being supported by a resilient labor market.
U.S. Treasury Secretary Janet Yellen told Reuters in an interview that she was focused on consumer and business spending.
"Those two elements of final demand came in line with last year's growth rate ... so this is the underlying strength of the U.S. economy that showed continuing robust strength and an economy firing on all cylinders."
Price pressures heated up by the most in a year, with a measure of inflation in the economy increasing at a 3.1% rate after rising at a 1.9% pace in the October-December quarter.
The personal consumption expenditures (PCE) price index excluding food and energy surged at a 3.7% rate after increasing at a 2.0% pace in the fourth quarter.
The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2% target. Inflation was boosted by increases in the costs of services like, transportation, insurance and housing, which offset a decline in goods prices such as motor vehicles and parts.
The strong readings pose an upside risk to March PCE inflation data due to be released on Friday, though much would depend on revisions to the January and February data.
Source: Investing