Please see below, a short update from Evelyn Partners on yesterday’s US GDP announcement and what this means for markets and investors. Received yesterday afternoon – 25/04/2024
What happened?
US real gross domestic product (GDP) increased at an annualised rate of 1.6% in the first quarter of 2024, according to the “advance” estimate released by the Bureau of Economic Analysis. This was lower than the consensus estimate among economists of 2.4% and indicates a slower yet still positive growth rate than in the fourth quarter of 2023, when real GDP increased by 3.4%.
What does it mean?
The US economy continued to expand albeit below expectations in the first quarter and at a slower rate than in Q4 of last year, with real GDP growing at 1.6% on an annualised basis and represents the weakest quarterly gain for nearly 2 years. This figure was lower than the 2.4% expected by the consensus of economist’s forecasts and the latest estimate from the Atlanta Fed GDP nowcast which estimated GDP at 2.7%.
The key driver of this came from personal consumption. Once again, the US consumer remained resilient over much of the quarter, regardless of the heightened interest rate environment. Despite weakening during January, retail sales rebounded during February and March, with a monthly growth rates of 0.6% and 0.7% respectively. This translated to a 1.7 percentage point contribution from consumption to the real GDP figure for Q1.
The robust labour market is a vital reason behind the resilient consumer and why US growth is holding up. Despite the rapid hiking of interest rates we’ve seen, the unemployment rate remains low and initial jobless claims are also subdued with a figure of 210k reported in the final week of Q1, far lower than the long-term average of 365k. While the labour market remains near full employment, households have the ability and willingness to spend, supporting the economy.
Despite consumption remaining strong, inventory accumulation remained subdued, subtracting 0.4 percentage points from the figure. However, if consumers keep spending and consumption remains strong, we expect this will increase during the coming quarters as businesses look to replenish stock.
Looking further into the rest of the underlying data, A narrowing in net exports took 0.9 percentage points off the headline figure. Government expenditure added 0.2 percentage points.
Core PCE, the Federal Reserve’s (Fed’s) preferred measure of inflation came in at 3.7%, slightly exceeding forecasts of 3.4% and Q4’s reading of 2%.
Looking at what this means for growth and monetary policy over the coming quarters. In recent months markets have reined in their rate cut expectations for 2024. At the start of the year markets had priced in nearly seven, 25 basis pint rate cuts, commencing from March, considerably more optimistic than the three cuts indicated by the FOMCs recent guidance. However, following three consecutive 0.4% monthly increases to Core CPI this year, markets have dampened their expectations, with less than two cuts now priced in for this year. With growth remaining resilient and inflation proving sticky we could see fewer rate cuts this year than the FOMC previously guided.
Bottom Line
The US economy continues to expand and with consumption remaining strong, supported by robust labour market conditions, growth should continue to hold up through 2024, prompting the economic soft-landing scenario to seem increasingly more likely. However, with the deceleration of inflation stalling, the start of rate cuts could be delayed until the second half of the year.
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Alex Kitteringham
26th April 2024