U.S. GDP grew by 1.6% in the first quarter, slower than expected
This marks the end of a six-quarter streak of GDP growth of 2% or more. But the downshift might not be cause for worry just yet.
The U.S. economy continued to grow between January and March, but at a slower clip than expected. The Commerce Department reported on Thursday that the GDP — that’s the sum of all the goods and services produced in the economy — expanded at an inflation-adjusted rate of 1.6% in the first quarter, snapping a six-quarter streak of 2% growth or more. But the downshift might not be cause for worry just yet.
Let’s start with the good news: consumer spending, the force that’s been buoying economic growth for months, still looks solid in this report.
“I know everyone’s getting tired of that ‘R’ word, but I’d rather use resilience as the ‘R’ word than recession,” said economist Jennifer Lee with BMO Capital Markets.
Strong wage growth is helping us keep up with inflation, Lee said. And while we bought a little less stuff in the first quarter, spending on services more than made up for it.
“People are still going out for dinner, people are still staying at hotels,” said Lee.
Now, the bad news: business leaders aren’t feeling quite as confident.
“I think we’ve had a tumultuous quarter,” said John Leer with Morning Consult. He says inflation proved stickier than we hoped early this year, sending interest rate forecasts all over the place.
“That creates some divergent expectations for businesses and in turn, business investment,” he said.
Inventories shrunk in the first quarter, which is sometimes a sign of caution or uncertainty. The report also looked at trade, and the country imported far more than it exported. But Jason Furman, an economist at Harvard, says those drags won’t necessarily endure.
“What depressed the GDP number was volatile categories that I don’t expect to see continued,” said Furman.
In other words, things like inventory and trade tend to jump around a lot. Consumer spending is usually more steady. But he does see one serious red flag in this report. Core PCE —the Fed’s favorite measure of inflation — clocked in at 3.7% growth in the first quarter, higher than expected.
“And so that was the bad surprise here,” Furman said. “That’s the biggest news for the Fed.”
And a data point they’ll be weighing ahead of next week’s meeting.