The Commerce Department reported Thursday that U.S. economic growth was much weaker than expected at the start of the year and prices rose at a faster rate.
According to the department's Bureau of Economic Analysis, gross domestic product, a broad measure of goods and services produced between January and March, increased at a 1.6% annual rate as adjusted for seasonality and inflation.
Economists surveyed by Dow Jones had expected a 2.4% gain following a 3.4% gain in the fourth quarter of 2023 and a 4.9% gain in the prior period.
Consumer spending increased 2.5% in the period, down from a 3.3% increase in the fourth quarter. Fixed investment and government spending at the state and local level helped keep GDP positive during the quarter, while private inventory investment fell and imports increased.
There's also some bad news on inflation.
The personal consumption expenditures price index, a key inflation variable for the Federal Reserve, rose 3.4% in the quarter, the biggest increase in a year. Excluding food and energy, core PCE prices rose at a 3.7% pace, well above the Fed's 2% target. Central bankers tend to focus on core inflation as a better indicator of long-term trends.
The GDP price index, sometimes called the “series-weighted” price index, rose at 3.1%, compared with a Dow Jones estimate of a 3% increase.
Markets tumbled after the news, with futures tied to the Dow Jones Industrial Average falling more than 400 points. Treasury yields edged higher, with the benchmark 10-year yield last coming in at 4.69%.
The report comes amid market worries about the state of monetary policy and when the Federal Reserve will start cutting key interest rates. The federal funds rate, which sets the rate banks charge each other for overnight lending, is within a target range of 5.25%-5.5%, the highest in about 23 years despite the central bank There has been no increase since July 2023.
Investors have had to adjust their views on when the Fed will begin easing as inflation remains elevated. The view expressed through futures trading is that interest rate cuts will begin in September and that the Fed may only cut once or twice this year.
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