Overview
The U.S. economy experienced a slowdown in the first quarter of 2024, with GDP growth decelerating to 1.3 percent. High interest rates and inflationary pressures are impacting consumer spending and business investment.
Why It Matters
The economic slowdown highlights the challenges of balancing growth and inflation control, emphasizing the importance of fiscal policies and interest rates on economic stability.
Who It Impacts
This slowdown affects all U.S. citizens, particularly those concerned with employment stability, inflation, and overall economic health.
The U.S. economy showed signs of deceleration in the first quarter of 2024, as the lingering effects of high interest rates implemented by the Federal Reserve began to permeate the economic landscape. According to the Bureau of Economic Analysis, the real GDP growth rate for the quarter was 1.3 percent, a decrease from the initial estimate of 1.6 percent. This downturn follows a robust 3.4 percent expansion in the final quarter of 2023, marking the slowest growth rate since early 2022.
Inflation eased slightly during this period, with the personal consumption expenditures (PCE) price index dipping from 3.4 percent to 3.3 percent. The core PCE, which excludes the volatile food and energy sectors, also saw a marginal decrease from 3.7 percent to 3.6 percent. Despite these reductions, the GDP Price Index, which measures inflation across all goods and services, remained steady at 3.1 percent. Real disposable personal income saw an upward adjustment of 0.8 percentage points to 1.9 percent, and the personal savings rate increased slightly to 3.8 percent.
Consumer spending, a key driver of economic growth, was revised downward from 2.5 percent to 2 percent. The contraction was particularly notable in goods spending, which fell by 1.9 percent, while services consumption surged by 3.9 percent. Government spending also contributed to the GDP, increasing by 1.3 percent with federal, state, and local expenditures accounting for 18 percent of the overall economic output. Net exports of goods and services grew by 1.2 percent, and gross private investment rose by 3.2 percent.
Financial markets reacted minimally to the revised GDP figures, with leading benchmark indexes experiencing slight declines of up to 0.8 percent before the market opened. U.S. Treasury yields fell, with the benchmark 10-year yield dropping to 4.57 percent, and the 2-year yield decreasing to below 4.94 percent. The 30-year bond yield also moved lower towards 4.7 percent. Meanwhile, the U.S. Dollar Index (DXY) remained under 105.00, reflecting subdued confidence in the currency’s near-term prospects.
Looking ahead, the economic outlook for the second quarter appears cautiously optimistic. The Federal Reserve Bank of Atlanta’s GDPNow Model anticipates a 3.5 percent growth rate for the April to June period, while the New York Fed Staff Nowcast predicts a more modest 2 percent growth. Despite these projections, opinions vary on the sustainability of the current economic momentum, with some experts expressing concerns over potential stagnation.
Torsten Slok, chief economist at Apollo, noted that companies in the S&P 500 are expected to see a rebound in business fixed investment in the coming quarters. However, the Federal Reserve’s latest Beige Book report revealed a mixed economic landscape, with businesses exhibiting cautious optimism amid rising uncertainty and downside risks.
Regional surveys, such as the Dallas Fed’s Texas Manufacturing Outlook Survey, indicated weakening manufacturing activity in May. Business sentiment was dampened by persistent inflation, a tight labor market, and elevated interest rates. A transportation equipment manufacturing executive summarized the situation, stating, “Things are in a mess.”
A recent survey from the RedBalloon-PublicSquare May Freedom Economy Index, which polled 80,000 small business owners, found that a majority believe the country is heading towards stagflation—a combination of stagnating growth and high inflation. The survey highlighted significant concerns over price pressures, with 40 percent of small businesses delaying bill payments to manage cash flows.
While small businesses express growing pessimism, consumer confidence showed a slight uptick. The Conference Board’s Consumer Confidence Index rose in May after three months of declines. Dana Peterson, chief economist at The Conference Board, noted that fewer consumers expect worsening business conditions, job availability, and income, leading to a higher Expectation Index. Nevertheless, the overall confidence gauge remains within a narrow range observed for over two years.
Inflation expectations also edged higher, with the average 12-month outlook increasing from 5.3 percent to 5.4 percent. The likelihood of a recession over the next 12 months has also risen, with more consumers perceiving a recession as “somewhat likely” or “very likely.”
As the economy navigates these challenges, the upcoming report on the Fed’s preferred PCE price index will be closely watched, with expectations that it will remain unchanged at 2.7 percent. Additionally, labor market data showed an increase in initial jobless claims to 219,000 for the week ending May 25, with continuing claims rising to 1.791 million.
The slowing economic growth and mixed signals from various sectors underscore the complexity of the current economic environment. Policymakers and market participants alike are keenly observing these developments to gauge the future trajectory of the U.S. economy.
