US Q1 GDP: Growth Slows to 1.6%

US Q1 GDP: Growth Slows to 1.6%

The US economy experienced its slowest growth in two years during the first quarter of 2024, recording a 1.6% increase in Gross Domestic Product (GDP). This figure fell short of Wall Street's expectations, which had anticipated a 2.4% rise.

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Deceleration in Key Sectors

The slowdown in growth was primarily attributed to decelerations in consumer spending, exports, and state and local government spending, according to the US Commerce Department's Bureau of Economic Analysis. Federal government spending also experienced a downturn during this period.

Impact on Consumer Spending and Exports

Consumer spending, a vital driver of economic growth, expanded at a slower-than-forecast rate of 2.5%. This deceleration marked a notable loss of momentum compared to the previous quarter and contributed to the overall slowdown in GDP growth. Additionally, exports faced a decline, further impacting economic expansion.

 Inflationary Pressures

The first quarter saw a significant uptick in inflation, driven particularly by a 5.1% increase in service-sector inflation, excluding housing and energy. This surge in inflationary pressures, nearly double the previous quarter's rate, influenced consumer behaviour and contributed to the subdued growth.

Government Spending and Trade

Government spending, particularly at the federal level, experienced a decrease, marking the first subtraction from GDP in two years. Business inventories also dragged down growth for a second consecutive quarter. However, residential investment surged the fastest since the end of 2020, indicating efforts to bolster inventory levels.

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Policy Implications and Federal Reserve Response

With the increase in inflation and the slowdown in economic growth, policymakers at the US Federal Reserve may face renewed pressure to delay interest rate cuts. The upcoming meeting will be closely watched for insights into the Fed's stance on monetary policy, with Chair Jerome Powell's comments expected to guide the path forward.

Labor Market Resilience

Despite the economic slowdown, the labour market has remained resilient, with initial applications for unemployment benefits reaching a two-month low. Continued job and wage gains have fueled optimism for a "soft landing," where inflation decreases alongside higher interest rates without triggering a recession.

Outlook and Further Revisions

The GDP estimate for the first quarter is subject to further revision, with the second estimate scheduled for release on May 30, 2024. The evolving economic landscape will continue to shape policy decisions and investor sentiment in the coming months.

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