U.S. economic growth in the first quarter was revised lower on Thursday, even as a key inflation measure broadly matched forecasts, according to data from the Commerce Department's Bureau of Economic Analysis. Gross domestic product increased at a 1.6% annualized rate in the first quarter on the agency's second estimate, down from the previously reported 2.0% pace.
The downward revision reflected cuts to estimates for inventory investment and consumer spending. Economists surveyed by Reuters had expected GDP to remain unrevised at a 2.0% rate.
Alongside the GDP update, the BEA reported that the personal consumption expenditures (PCE) price index rose 3.8% in the 12 months through April, marking the largest year-on-year increase since May 2023. The March PCE reading was unrevised at 3.5% year-on-year, and economists polled by Reuters had forecast a 3.8% year-on-year rise for April.
On a monthly basis, the PCE price index increased 0.4% in April following a 0.7% gain in March. The core PCE price index, which excludes food and energy and is closely watched by policymakers, climbed 3.3% year-on-year in April after a 3.2% increase in March. Core PCE advanced 0.2% month-on-month in April, down from a 0.3% gain the prior month.
Market response
Equity markets opened slightly lower following the data release. The S&P 500 was down about 0.1% on Thursday morning, while the Nasdaq composite was off roughly 0.3%. Treasury yields remained mostly unchanged, with the two-year note trading near 4.04% and the 10-year around 4.48%. The dollar index was a touch softer, down about 0.1% at 99.16.
Analysts' reactions
"The two key numbers here are inflation on a yearly basis, and of course, economic growth, GDP, which was revised downward. What the numbers point to today is simply that we have a stagflation problem. And that’s a big problem for the Fed. We have growth that’s not that strong and rising inflation. And that suggests that a Fed hike is getting closer to reality as opposed to a rate cut." - Peter Cardillo, Chief Market Economist, Spartan Capital Securities, New York
"I don’t think the data changed the narrative. The (PCE) number was not as bad as feared. It pushes back a little bit against some expectations for rate hikes. At the end of the day, though, we know that’s backward looking, and a lot of the focus is on the negotiations or lack thereof, the achievement of a peace deal. So, oil prices are still moving inflation expectations around. We do have a situation where consumers continue to spend. There is also a lot of intense AI spending, and that’s part of the inflation story." - Angelo Kourkafas, Senior Global Investment Strategist, Edward Jones, St. Louis, Missouri
"Softer core inflation readings and weaker headline growth data are helping fuel a risk-on reaction, with markets taking comfort in signs that underlying price pressures may be easing without a meaningful deterioration in the labor market, helping to take some pressure off the Fed and support expectations for a less restrictive policy outlook." - Joel Kruger, Market Strategist, LMAX Group, London
What the data mean in context
The combination of a downward revision to GDP and a headline PCE gain that matched expectations leaves policymakers and market participants confronted with a familiar dilemma: growth that is softer than previously estimated but inflation that remains above the Fed's longer-run target. The GDP downgrade specifically points to weaker inventory accumulation and slower consumer outlays than initially measured, while the PCE figures indicate that inflationary pressures remain elevated on an annual basis even as monthly core inflation showed a small slowdown.
Investors have responded with modest caution in equities and little change in bond yields, suggesting a market still weighing whether softer growth will cool price pressures or whether persistent inflation will keep policy tighter for longer.