US economy grew slower than expected at the start of 2024

The U.S. economy grew at a slower pace than expected at the beginning of 2024 as consumers pulled back on spending in the face of higher inflation. 

Gross domestic product, the broadest measure of goods and services produced across the economy, grew by 1.6% on an annualized basis in the three-month period from January through March, the Commerce Department said in its first reading of the data on Thursday. 

That is much lower than the 2.4% increase forecast by LSEG economists and marks a sharp slowdown from the 3.4% pace seen during the fourth quarter. It is the slowest pace of growth in two years.

“This was a worst of both worlds report – slower than expected growth, higher than expected inflation,” said David Donabedian, chief investment officer of CIBC Private Wealth US. “The biggest setback is the acceleration in core inflation, and in particular, the services sector rising above a 5% annual rate.”

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Consumer spending, which accounts for about two-thirds of GDP, moderated during the first quarter. It rose 2.5% for the period, down from the 3.3% figure recorded the previous quarter amid signs the Federal Reserve’s fight against inflation has stalled. 

The report showed that an inflation gauge closely watched by the Fed rose 3.4% during the first quarter, the largest gain in a year. Excluding food and energy, prices jumped 3.7%. Both figures point to inflation that is still running well above the Federal Reserve’s 2% target even as the economy starts to slow in the face of higher interest rates.

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“The economy slowed, but still doesn’t appear to be at risk of stalling,” said Jim Baird, Plante Morgan Financial Advisors CIO. “The combination of slower growth and sticky inflation will undoubtedly increase the whispers around potential stagflation risk, potentially complicating the Fed’s job over the duration of the year.”

The economy has remained solid even as experts predicted that the Federal Reserve’s aggressive interest rate hike campaign would send it spiraling into a recession. For all of 2023, the economy expanded 3.1%, up less than 1% in the previous year. 

However, there are signs that growth is finally beginning to slow in the face of tighter monetary policy. Job growth is moderating. The housing market, which is vulnerable to higher interest rates, is trapped in a prolonged downturn, and consumer spending has shown signs of cooling off.

Many economists expect to see further cooling in coming months as higher interest rates continue to work their way through the economy.

“The economy will likely decelerate further in the following quarters as consumers are likely near the end of their spending splurge,” said Jeffrey Roach, chief economist at LPL Financial. “Savings rates are falling as sticky inflation puts greater pressure on the consumer.”

Stocks tumbled after the worst-than-expected report, with the Dow Jones Industrial Average sliding more than 600 points during early trading.