05/31/2024

Economic Slowdown, Inflation Eases

According to revised data released by the U.S. Department of Commerce on May 30, the annualized quarter-on-quarter growth rate of the U.S. real GDP for the first quarter of 2024 was 1.3%, down 0.3 percentage points from the initial estimate of 1.6% and significantly slower than the 3.4% growth in the fourth quarter of last year.

This adjustment was mainly due to personal consumption expenditures (PCE) falling short of expectations. The annualized quarter-on-quarter growth of PCE in the first quarter was 2%, down 0.5 percentage points from the initial estimate of 2.5% and below the market expectation of 2.2%.

On the inflation front, the PCE price index grew 3.3% on an annualized quarter-on-quarter basis in the first quarter, slightly below the initial forecast. The core PCE price index rose by 3.6%, down 0.1 percentage points from the initial estimate of 3.7%, and significantly higher than the 2% growth in the fourth quarter of last year. While this indicates that inflationary pressures still exist, it also shows that inflation is on a path of moderation.

The main reason for the slowdown in real GDP growth in the first quarter was the significant weakness in goods spending, especially on automobiles, with consumer spending data being revised downward. Compared to the initial estimate, exports and government spending also slowed. However, residential investment and imports showed some recovery.

GDP Expected to Rebound in Q2

Despite the slowdown in economic growth in the first quarter, the latest forecasts suggest that the growth rate in the second quarter could reach 3% or higher, indicating a potential short-term recovery in the economy. However, the sustainability and strength of this recovery remain uncertain.

Analysts believe that even if GDP rebounds in the second quarter, the U.S. economy is unlikely to show strong momentum in the second half of the year.

Consumers are having to dip into their savings to maintain current spending levels, and persistent inflation is eroding their purchasing power. Additionally, the upcoming presidential election may lead businesses to adopt a more cautious approach to spending and investment.

The capital market’s expectations for a rate cut by the Federal Reserve within the year have significantly diminished. The market’s bet on the first rate cut has been pushed from the previously expected September to November. The probability of a rate cut in September has also dropped from around 70% to about 50%.

Disagreement Over Timing of Rate Cuts Increases

Minutes from the Federal Reserve’s policy meeting indicate that most participants believe there is continued uncertainty regarding inflation and unanimously agree that recent data has not increased their confidence in inflation falling back to 2%. This suggests that the Fed still considers inflation as a primary factor in its monetary policy decisions.

However, there are some optimists among them. Federal Reserve Governor Christopher Waller is optimistic about the decline in inflation, stating that there is no need for further rate hikes and supports an early rate cut.

In a speech at the Peterson Institute for International Economics on May 21, Waller said that the April inflation data suggests that progress towards the 2% target may have resumed, indicating that U.S. inflation has not accelerated and that further rate hikes are unnecessary.

Waller particularly focuses on the non-manufacturing PMI. The latest data shows that the non-manufacturing PMI, which accounts for the largest share of output, fell below 50, hitting its lowest point since December 2022, indicating a slowdown in economic activity.

He stated that if these data trends continue, it would mean that economic activity outside of manufacturing is slowing. If this data continues to soften over the next 3-5 months, the Fed may have to initiate rate cuts.

On the contrary, Federal Reserve Governor Michelle Bowman expects U.S. inflation to remain high for an extended period and reiterated that further rate hikes are possible if necessary.

“If the upcoming data indicate that progress in fighting inflation has stalled or reversed, I remain willing to raise the target range for the federal funds rate at future meetings,” she said.

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