Slow, but solid US economic growth anticipated in Q1; inflation likely heats up

U.S. economic growth likely slowed to a still-solid pace in the first quarter while inflation accelerated, reinforcing financial market expectations that the Federal Reserve would delay cutting interest rates until September.

The Commerce Department's snapshot of first-quarter gross domestic product on Thursday is expected to show consumers still doing the heavy lifting for the economy, thanks to a resilient labor market. The economy has defied prophecies of doom since late 2022 following the U.S. central bank's aggressive rate hiking campaign to snuff out inflation.

The United States is outperforming other advanced economies. Consumers locked in lower mortgage rates, while businesses refinanced debt before the tightening cycle began, economists say. Companies are also hoarding workers after experiencing difficulties finding labor during and after the COVID-19 pandemic, and are enjoying higher profit gains because of strong pricing power.

"They have been relatively insulated from the rate increases," said Richard de Chazal, macro analyst at William Blair. "In past economic cycles, at the first whiff of an economic slowdown, companies in the U.S. used to fire workers very quickly and then they knew that they could hire them back very quickly once the cycle turned."

Gross domestic product likely increased at a 2.4 per cent annualised rate last quarter, according to a Reuters survey of economists. Estimates ranged from a 1 per cent pace to a 3.1 per cent rate. The economy grew at a 3.4 per cent pace in the fourth quarter.

It is expanding at a pace above what Fed officials regard as the non-inflationary growth rate of 1.8 per cent. The International Monetary Fund last week upgraded its forecast for 2024 U.S. growth to 2.7 per cent from the 2.1 per cent projected in January, citing stronger-than-expected employment and consumer spending.

Job gains in the first quarter averaged 276,000 per month compared to the October-December quarter's average of 212,000.

Labor market resilience is likely to be underscored by the Labor Department's weekly jobless claims report, which is expected to show first-time applications for unemployment benefits climbing 3,000 to a seasonally adjusted 215,000 in the week ending April 20. Initial claims have bounced around in a 194,000-225,000 range this year.

Low layoffs are keeping wage growth elevated, sustaining consumer spending, which accounts for more than two-thirds of economic activity.

Though inflation probably surged, with the personal consumption expenditures (PCE) price index excluding food and energy forecast increasing at a 3.4 per cent rate after rising at 2.0 pace in the fourth quarter, economists were not worried about a resurgence in price pressures.

RATE CUTS STILL EXPECTED

The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2 per cent target. The central bank has kept its policy rate in the 5.25 per cent-5.50 per cent range since July. It has raised the benchmark overnight interest rate by 525 basis points since March of 2022.

James Knightley, chief international economist at ING, said persistent inflation would require higher wages, which would give consumers more purchasing power and allow companies to raise prices..."but what we're seeing is labor demand and cost indicators weakening quite considerably."

"There doesn't appear to be a threat of wage growth accelerating and keeping inflation elevated for longer."

Economists believe consumer spending more or less maintained the 3.3 per cent growth pace seen in the fourth quarter, also supported by higher stock market prices.

They, however, worry that lower-income households have depleted their pandemic savings and are largely relying on debt to fund purchases. Recent data and comments from bank executives indicated that lower-income borrowers were increasingly struggling to keep up with their loan payments.

The economy was also likely supported by the housing market, with double-digit growth anticipated in residential investment thanks to a severe shortage of previously owned homes for sale, which is encouraging the construction and sale of new single-family homes. Business spending on intellectual property was probably a boost as companies invest in artificial intelligence.

Though investment in nonresidential structures continued to rise, the pace likely slowed sharply from the past year when companies took advantage of policies by President Joe Biden's administration to bring the production of semiconductor manufacturing back to the United States by building factories.

Trade likely subtracted from GDP growth as some of the increase in consumer spending was satiated by imports.

Business spending on equipment was probably another drag, contracting for the third straight quarter. That together with weakness in sentiment surveys have led some economists to believe the economy is likely not as strong as portrayed by the GDP and labor market data and to expect a slowdown in growth.

Others, however, cautioned against reading too much into the divergence between the so-called hard data and the sentiment surveys, arguing that the pandemic had made it difficult to get a clear signal from the surveys. They also argued that businesses were generally conservative by nature.

"Those (survey) gauges still have not normalized yet, relative to the reality of the economy," said Brian Bethune, an economics professor at Boston College. "Businesses are seeing things pan out somewhat better than what they expected, which is what matters for them."

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