U.S. economic momentum picked up in the first quarter as a rebound in government spending offset weakness from late 2023, the Commerce Department’s Bureau of Economic Analysis said in its advance GDP estimate on Thursday. Gross domestic product expanded at a 2.0% annualized pace in the quarter.
The outturn fell short of the consensus economists' forecast of a 2.3% annualized increase, with much of the reported growth attributed to a partial reversal in government outlays that had weighed on the economy at the end of last year.
Alongside the headline GDP release, the Commerce Department published March data for the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation gauge. The PCE rose 3.5% year-over-year in March, matching consensus expectations, and was up 0.7% from February, also in line with estimates. The core PCE price index, which removes food and energy, increased 0.3% for the month, matching forecasts.
Market reaction
- Stocks: U.S. major indexes were set to open higher, with futures tracking the Dow Jones Industrial Average up 0.7%.
- Bonds: Treasury securities rallied on Thursday morning. The 2-year note yield fell 6 basis points to 3.89% and the 10-year note yield declined 3 basis points to 4.38%.
- Forex: The dollar index eased 0.4% to 98.50.
Commentary from market participants and economists underscored the mixed implications of the data. Peter Cardillo, chief market economist at Spartan Capital Securities in New York, characterized the 2.0% GDP as a rebound from the weak Q4 pace, which he attributed largely to the government shutdown.
“Well, 2.0% GDP was a rebound from the low growth rate in Q4, which was mostly due to the government shutdown. The first quarter suggests that we’re probably going to average 2.5% for the year, is solid growth, but certainly nothing that you can describe as extreme. It’s basically the average GDP growth that we’ve had for the past four to five years.”
Cardillo also flagged the resilience of consumer spending while cautioning that rising energy costs linked to the war with Iran could squeeze household budgets and lift inflation further.
“Personal spending came in better than expected, and it shows that the consumer remains resilient. That’s subject to change, of course, if energy prices continue to rise. Headline and core year-on-year inflation above 3.2% is obviously a negative. And most of it, of course, is due to energy prices. For now, we can label it as transitory. However, if the war continues and energy prices do not come down from the present levels, that transitory inflation will become constant inflation and certainly a major headache for the Federal Reserve.”
Michael Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management in Boston, described the data as mixed but largely validating the Federal Reserve's recent shift toward a slightly more hawkish stance.
“The U.S. data this morning was mixed but probably validates the Fed’s stance yesterday of a little bit of a hawkish turn or a hawkish leaning compared to the previous meeting. I would not be leaning into any of the communication that a hike is in anyone’s immediate forecast, but some more balanced view and more just a commitment to looking at how the economic data comes in from here on out.”
Lorizio noted that core PCE was materially higher than the Fed would prefer and that strong labor market signs - such as low jobless claims and continuing claims - give the central bank reasons for continued caution. He added that the data do not provide cover for near-term rate cuts.
Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin, observed that not all growth is equally robust, pointing to sector contributions in the quarter.
“High growth isn’t always healthy growth. Half a percentage point of GDP growth came from computers and another half from healthcare. It’s not a shaky foundation for growth, but not the most solid either.”
The simultaneous picture of modest growth driven in part by government spending and inflation that remains at levels above the Fed’s comfort zone underscores the policy dilemma facing market participants and policymakers. While consumer spending showed resilience in the month, the impact of higher gasoline and energy prices related to geopolitical tensions was highlighted repeatedly as a potential source of persistent inflation if the conflict continues.
For now, the headline GDP and PCE releases keep markets focused on the interplay between growth, energy prices and central bank messaging as investors assess the path for interest rates and risk assets in the months ahead.