The U.S. economy grew at a slower pace than initially estimated in the first quarter, with the Commerce Department revising the annualized growth rate to 1.3%, down from the previously reported 1.6%. This revision reflects a deceleration from the 3.4% growth seen in the final quarter of 2023, highlighting a softer start to the year amid persistent economic uncertainties.
The downward adjustment in Gross Domestic Product (GDP) was primarily driven by weaker consumer spending and reduced equipment expenditures. Personal consumption expenditures, a significant component of GDP, increased at a revised rate of 2%, down from the earlier estimate of 2.5%. The decrease was largely attributed to a larger-than-expected decline in goods purchases, which fell by 1.9% compared to the initial estimate of a 0.4% drop. Spending on services rose slightly lower than initially reported, at 3.9%.
This slower growth coincides with ongoing inflationary pressures. The measure of inflation during the first quarter was revised to 3.3%, slightly below the previous estimate of 3.4%, marking the most substantial quarterly price increase in a year. The Federal Reserve, closely monitoring these inflation trends, has indicated that it might delay any potential interest rate cuts as inflation remains stubbornly high.
U.S. Treasury yields saw a modest decline following the GDP revision, while equity index futures pared some of their earlier losses. The revised GDP figures bring the first-quarter growth rate to the lowest since Q2 2022, when the economy contracted, and remain below the Fed's long-term noninflationary growth potential of 1.8%.
In parallel with the GDP revision, the Labor Department reported a slight increase in jobless claims. Initial claims for state unemployment benefits rose by 3,000 to a seasonally adjusted 219,000 for the week ending May 25, marginally higher than the 218,000 claims anticipated by economists. Continuing claims, which track the number of people receiving benefits beyond the initial week, also increased by 4,000 to 1.791 million for the week ending May 18.
Despite these upticks, the labor market continues to show underlying strength. The increase in jobless claims is seen as part of a broader rebalancing following the Federal Reserve's aggressive interest rate hikes totaling 525 basis points since March 2022. These hikes were aimed at slowing demand to cool the economy and curb inflation.
Federal Reserve Chair Jerome Powell and other officials have emphasized the importance of watching final sales to private domestic purchasers, a key metric of underlying growth. This measure grew at a solid 2.8% rate in the first quarter, albeit down from the initially reported 3.1%.
The core Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, rose at a 3.6% annual rate in the first quarter, slightly lower than the initial 3.7% estimate. This followed a 2% increase in the fourth quarter of 2023.
Market reactions to these economic indicators were mixed. S&P 500 futures slipped by 0.2% following the data releases, reflecting concerns over slower economic growth and persistent inflation. The broader market was also weighed down by disappointing earnings results from major companies, including Salesforce, which cited macroeconomic headwinds.
In the context of these economic trends, the probability of a Federal Reserve rate cut by September remains uncertain. Prior to the GDP revisions, market expectations were split, with a 49% chance of a rate cut by the September 18 meeting. However, recent data and hawkish comments from Fed officials have tempered expectations, with markets now seeing a 61% chance that the Fed will either limit rate cuts to one quarter-point or hold rates steady throughout 2024.
The economic landscape remains complex, with signs of modest or slight growth across most parts of the country, as highlighted in the Fed's Beige Book report. Investors and policymakers alike will continue to monitor these indicators closely as they navigate the balance between sustaining economic growth and controlling inflation.
