US GDP, according to the first estimate (or ‘advance estimate’) for real GDP growth, revealed a HUGE miss and stresses a cooling economy.

According to the Commerce Department, US economic activity slowed significantly in Q1 of 2024, increasing at an annualised rate of 1.6%. This fell considerably short of economists’ estimates of 2.5% (the estimate range was between 3.1% and 1.0%) and down from the upwardly revised final estimate for Q4 2023 at 3.4% and comfortably below the Q3 (2023) reading of 4.9%. The latest release marks the softest level in nearly two years (since Q2 2022) and was also substantially lower than the Atlanta GDPNow model’s estimate of 2.7% real GDP growth in Q1.

As shown below, combined with the last two quarters, we are clearly trending southbound.

Slowdown in Government and Household Spending

Data specifics reveal that the slowdown in growth was due to cooling spending, which slowed considerably for both households and governments in Q1. According to the Bureau of Economic Analysis (BEA), personal consumption expenditures increased to an annualised pace of 2.5% in Q1, down from 3.3% in Q4 2023, with government expenditures slowing rather noticeably to 1.2% from 4.6% over the same period. Residential fixed investment, nonetheless, was markedly stronger in Q1, up nearly 14.0% from the 2.8% reading in Q4 2023.

Consumption in services remained robust, up 1.78%, though a slowdown in consumption was seen in durable goods, particularly in motor vehicles and gasoline and other energy products, down -0.25% and -0.19%, respectively.

The second estimate (or ‘preliminary’ release) for Q1 will be available on 30 May.

Inflation Hotter than Expected

Despite slower growth, the report delivered a surprisingly hot inflation print, which, given inflation still being key for the Fed, is understandably what the market seems to have responded to. The Core Personal Consumption Expenditures (PCE), which excludes food and energy components, rose at an annualised rate of 3.7% in Q1, north of the 3.4% expected and the 2.0% reading in Q4 2023. The headline PCE Price Index also rose 3.1% in Q1, up from 1.8% previous.

The latest numbers come a day ahead of the BEA’s PCE Price Index data. James Knightley, chief economist at ING, commented: ‘Thursday’s quarterly inflation data suggest, assuming no revisions to monthly data, that the core PCE deflator for March, to be released Friday, will come in above 0.4% rather than the current consensus forecast for a month-over-month increase of 0.3%’.

It would seem that as long as employment remains firm, this could underpin economic activity for now, perhaps even enough to have the Fed hold the line for the remainder of 2024. However, it is too early to tell at this juncture, with much more data to be processed between now and then.

Market Pricing Suggests Less than Two Rate Cuts This Year

According to Fed fund futures, markets are pricing in approximately 36bps of easing for the year – less than the Fed’s projected three rate cuts displayed in the latest Summary of Economic Projections (SEP). Market pricing, nevertheless, shows that the first 25bp cut is now fully priced for November, though trailed closely by September’s meeting (-20bps). The next update from the FOMC is next week on Wednesday; the focus is undoubtedly going to be on the accompanying Rate Statement and the Press Conference held by Fed Chair Jerome Powell as traders seek further insight into the thinking behind the Fed’s next move.

Market Snapshot

Global equity markets experienced selling pressure following the GDP data (with US equity index futures following suit), driving US Treasury yields and the US dollar (USD) northbound. As a result, the benchmark 10-year yield clocked a high of 4.74%, reaching its highest level since late 2023.