U.S. Economy Slows in Q1 2024 Amid Higher-Than-Expected Inflation

The U.S. economy slowed more than anticipated in the first quarter of 2024, with gross domestic product (GDP) increasing at an annualized rate of just 1.6%, down from 3.4% in the previous quarter. This marked the weakest pace of growth since the second quarter of 2022, falling well short of economists' forecasts of 2.5% growth.

The slowdown was primarily driven by a sharp increase in imports, a decrease in inventory investment, and a deceleration in government spending. Consumer spending, which accounts for the majority of economic output, remained strong but moderated somewhat, rising 2.5% compared to 3.3% in the fourth quarter of 2023.

Compounding concerns, inflation accelerated during the quarter, with the Federal Reserve's preferred gauge, the personal consumption expenditures (PCE) price index, rising at a 3.4% annual rate, up from 1.8% in the previous quarter. Core PCE prices, which exclude volatile food and energy costs, surged at a 3.7% pace, well above the central bank's 2% target.

Why this matters: The combination of slowing growth and higher-than-expected inflation raises the possibility of stagflation, a damaging economic scenario characterized by stagnant growth and elevated price pressures. This development complicates the Federal Reserve's efforts to guide a soft landing for the economy as it seeks to tame inflation without triggering a recession.

The disappointing GDP report has shifted expectations for the Fed's policy trajectory, with markets now pricing in a higher likelihood that the central bank will keep interest rates elevated for longer. Some analysts believe the first rate cut may now be pushed back from June to July.

Despite the weaker-than-expected headline GDP figure, some economists argue that the underlying fundamentals of the economy remain solid. "Private domestic demand and underlying economic momentum remain robust, suggesting the economy may be stronger than the GDP figures indicate," noted Sarah House, senior economist at Wells Fargo.

However, others warn that the U.S. economy could be facing a stagflation scenario reminiscent of the 1970s. "The 'worst of both worlds' report of slower growth and higher-than-expected inflation has forced the Federal Reserve into a more hawkish stance," said Gregory Daco, chief economist at EY-Parthenon. "Economists warn that the U.S. economy could be facing a 'stagflation' scenario, with stubborn inflation and weak growth."

The latest GDP data has intensified the debate over whether the Fed should continue hiking rates to combat inflation or pivot to rate cuts to support growth. For now, the central bank appears likely to maintain its hawkish stance, with inflation still running well above its target. However, a further slowdown in economic momentum in the coming quarters could prompt a reassessment of this position.

Key Takeaways

• U.S. GDP grew 1.6% in Q1 2024, down from 3.4% in Q4 2023, missing forecasts.
• Slowdown driven by higher imports, lower inventory investment, and slower government spending.
• Inflation accelerated, with PCE price index rising 3.4% and core PCE up 3.7%.
• Stagflation concerns as growth slows and inflation rises, complicating Fed's policy path.
• Debate over Fed's next move - continue hiking to fight inflation or cut to support growth.