Q1 GDP Comes Back Down to Earth, Experts Mixed on Fed Impact

A red-hot American economy has at least started demonstrating signs of losing steam, as fresh Commerce Department data showed that U.S. gross domestic product (GDP), while still growing, slowed below expectations during the first three months of 2024.

The Commerce Department’s Bureau of Economic Analysis (BEA) said Thursday that GDP, factoring in both seasonality and inflation, grew at just a 1.6% annualized pace during the first three months of 2024. It was a considerable slam on the brakes following 3.4% growth during 2023’s final quarter, and well below Dow Jones-surveyed economists’ estimates for 2.4%. GDP still grew, of course, and that was driven by slower but still robust consumer spending, residential and nonresidential fixed investment, as well as state and local government spending. Private inventory investment declined, and imports (which the U.S. Bureau of Economic Analysis notes are a “subtraction in the calculation of GDP”) increased.

“While consumer spending softened only marginally, the composition of that spending was a tale of two halves,” says Mike Reynolds, Vice President of Investment Strategy at Glenmede. “Households spent less on goods and more on services in Q1, driven by a sizable decline in motor vehicle purchases and increases in healthcare, financial services and insurance.” The Best ETFs to Buy for a Prosperous 2024 The personal consumption expenditures (PCE) price index climbed by 3.4% annualized during the first quarter, which was well ahead of Q4 2023’s 1.8% pace and its briskest climb in the past year. The “core” PCE price index (excluding food and energy) grew by 3.7% annualized, up from the prior quarter’s 3.2%. Both figures were ahead of the Federal Reserve’s 2% target. “Today’s numbers could put a July rate cut in play, but that still means somewhere between zero and two cuts this year. The Fed will cut rates when either economic growth slows meaningfully, or inflation settles below 3% for a number of months,” says Scott Helfstein, SVP, Head of Investment Strategy at Global X. “The Fed is not apt to make any major moves ahead of the election in September or November. So, it comes down to the July 31 and December 18 meetings. There is a lot of data that will come out before December, but one cut in 2024 looks reasonable.”

More Pros’ Takes on Q1 GDP

Here’s what several experts have to say about the first-quarter GDP numbers and what they mean for the economy, the Federal Reserve’s future actions, the market, and more: The Best Dividend Stocks: 10 Pro-Grade Income Picks “Despite the expected GDP slowdown in 2024, there are no imminent signs of a recession, showcasing the economy’s continued resilience. If GDP growth stays above 3% and borrowing costs drop, the equity market’s performance may continue to broaden—further encompassing small and midsize companies and expanding beyond the Magnificent 7 stocks, which carried much of the S&P’s load the past couple of years. This suggests a shift in market dynamics without signaling a negative outlook for the overall economy. Considering the Federal Reserve’s focus on achieving 2% inflation, even if GDP falls slightly short in 2024, the market’s strength is likely to continue. “Inflation has plateaued over the past six months, making it highly unlikely that the Fed will cut interest rates in the coming months. However, as the presidential election nears in November, any decision by the Fed regarding cuts is sure to be politicized.” —Stephen J. Rich, Chairman & CEO, Mutual of America Capital Management “Stagflation is a growing risk after GDP missed and the price index surprised to the upside. If inflation isn’t getting better with such a weak growth, you have to wonder if the trend toward lower prices will continue. The bump in yields after the report suggests rate cuts are increasingly in doubt.” —David Russell, Global Head of Market Strategy at TradeStation “The GDP missing expectations this quarter may be a sign that the economy is finally reacting to the ongoing interest rate hikes we saw over the past year. For the first time in a while, we are seeing consumer spending begin to fall as inflation remains high. We expect that this quarter’s GDP results will encourage the Fed to move forward with their expected rate cuts later this year, helping the economy to further stabilize. “Despite this quarter’s slower growth rate, the jobs market remained strong during Q1. However, we will likely also see a slowdown in the jobs report as well. Moving forward, I expect the unemployment rate will remain below 4.5% for the near term but will rise closer to 5% over the next two years, with a simultaneous curtailing of wages.” —Steve Rick, Chief Economist, TruStage, a provider of financial services to credit unions and their customers “GDP growth disappointed at 1.6%, but excluding volatile inventories and net exports, final demand was actually strong, rising 2.8% in Q4 (above the 2010-2019 trend of 2.4%). In fact, government spending was weaker than prior quarters, and if you exclude it, private final demand rose 3.1%, which is really strong.” —Sonu Varghese, Global Macro Strategist, Carson Group The 10 Best Vanguard Index Funds You Can Buy