Daily Management Review

US Economy Is Held Back By Imports In The First Quarter, With Inflation Spiking


US Economy Is Held Back By Imports In The First Quarter, With Inflation Spiking
The first quarter saw the U.S. economy expand at its slowest rate in almost two years due to a spike in imports and a slight accumulation of unsold goods at businesses. These indications of strong demand, coupled with an increase in inflation, confirmed expectations that the Federal Reserve would not lower interest rates before September.
The Commerce Department's assessment of the first-quarter GDP on Thursday, which also showed a decrease in government spending, revealed slower-than-expected growth, which overstated the deceleration in economic activity. Better measured as domestic demand, consumer spending somewhat decreased, business investment increased, and the housing recovery gained momentum.
The two most erratic components of GDP are trade and inventories, which are frequently revised as the government revises its growth projections. Next week, during the U.S. central bank's policy meeting, it is anticipated that Fed officials will maintain current interest rates.
According to Daniel Vernazza, chief international economist at UniCredit, "the Fed will likely view the GDP report as solid, while the upward surprise to inflation will support the central bank's case for waiting longer before cutting rates."
According to the Bureau of Economic Analysis of the Commerce Department, GDP grew at the slowest rate since the second quarter of 2022 last quarter, 1.6% annualised. According to Reuters polled economists, GDP would grow at a 2.4% annual rate, with projections ranging from a 1.0% to a 3.1% pace.
The fourth quarter saw 3.4% growth in the GDP. The first-quarter growth rate was less than the 1.8% non-inflationary growth rate, according to U.S. central bank authorities.
After growing at a 3.3% rate in the fourth quarter, the economy expanded at a 3.1% rate when inventories, government spending, and trade were excluded. This refutes the idea that government expenditure was stimulating the economy.
A robust labour market is bolstering the U.S. economy, which has outpaced the economies of other developed countries.
In an interview, U.S. Treasury Secretary Janet Yellen stated that her attention was on spending by businesses and consumers.
"Those two elements of final demand came in line with last year's growth rate ... so this is the underlying strength of the U.S. economy that showed continuing robust strength and an economy firing on all cylinders."
As a measure of inflation in the economy increased at a 3.1% rate after rising at a 1.9% pace in the October-December quarter, price pressures increased to their highest level in a year.
Following a 2.0% increase in the fourth quarter, the personal consumption expenditures (PCE) price index, which does not include food and energy, increased at a 3.7% annual rate.
One of the inflation indicators that the Fed monitors in order to reach its 2% target is the so-called core PCE price index. A decrease in the price of things like autos and parts was countered by rises in the cost of services like housing, insurance, and transportation, which increased inflation.
Though much would depend on revisions to the January and February statistics, the robust readings provide an upside risk to the PCE inflation data for March, which is scheduled for release on Friday.
Since July, the Federal Reserve has maintained its benchmark overnight interest rate between 5.25% and 5.50%. Since March 2022, the policy rate has increased by 525 basis points.
Wall Street stocks were trading at a lower level. In comparison to a currency basket, the dollar declined. Bond rates in the US increased.
It is still too early to see a big slowdown in the labour market. Initial claims for unemployment benefits decreased by 5,000 to a seasonally adjusted 207,000 in the week ending April 20, according to the Labour Department's weekly report on jobless claims.
During the week ending April 13, the number of people getting benefits following an initial week of aid—a proxy for hiring—dropped by 15,000 to 1.781 million. The period during which the government polled households to determine April's unemployment rate was covered by the so-called continuous claims data.
Between the survey periods of March and April, continuing claims decreased, suggesting that the unemployment rate remained essentially steady from its February decline of 3.9% to 3.8% last month.
Because of low layoffs, wages are remaining strong and supporting consumer spending, which makes up over two thirds of economic activity. The 3.3% growth pace rate recorded in the October–December quarter was slowed to a still respectable 2.5% growth rate in consumer spending. Healthcare, banking, and insurance were the main drivers of spending, more than offsetting a fall in products like cars and petrol.
This year, spending is probably going to steadily decline. Due to the depletion of their COVID-19 epidemic reserves, lower-income households are mostly depending on loans to make purchases. According to recent data and remarks made by bank officials, borrowers with lower incomes were finding it more and more difficult to make their loan payments.
Despite the fact that income grew at a rate of $407.1 billion in the fourth quarter as opposed to $230.2 billion, inflation and higher taxes offset the gains. After deducting taxes and inflation, household disposable income increased at a 1.1% annual rate as opposed to a 2.0% annual rate during the October–December quarter.
From 4.0% in the previous quarter to 3.6% this quarter, the saving rate dropped.
According to Oxford Economics senior economist Ryan Sweet, "the recent stickiness in inflation lends downside risk to the near-term forecast for consumption as it could weigh on real disposable income."
The amount of inventory was reduced, increasing at a $35.4 billion rate as opposed to a $54.9 billion pace in the fourth quarter. Inventories reduced GDP growth by 0.35 percentage points.
Imports were used to offset a portion of the spending, which caused the trade deficit to increase to $973.2 billion from $918.5 billion in the October–December quarter. Trade reduced GDP growth by 0.86 percentage points.
The rate of government spending fell to 1.2% from 4.6% in the October-December quarter due to a decrease in federal government expenditures, primarily for defence. Spending by businesses increased as a result of their AI investments.
For the first time in over a year, investment in nonresidential buildings such as factories shrank as the benefits of the Biden administration's plans to revive semiconductor manufacturing in the United States diminished.
Despite increasing mortgage rates, residential investment grew at its quickest rate since the fourth quarter of 2020 due to an increase in both house sales and housing construction.
Well Fargo analyst Shannon Grein stated, "Don't underestimate this economy."