U.S. economic growth slows. Is there cause for concern?

Executive summary:

  • U.S. GDP slowed to a 1.6% clip during the first quarter of 2024
  • The Fed's preferred inflation gauge came in slightly hotter than expected in the first quarter
  • So far, the results from first-quarter earnings season in the U.S. are mixed

On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed the U.S. first-quarter GDP (gross domestic product) reading. They also reviewed the latest U.S. inflation data and provided an update on U.S. first-quarter earnings season.

Q1 economic growth misses expectations in the U.S.

Antal-Gilbert and Lin opened the discussion with a look at first-quarter GDP in the U.S., which Lin noted came in weaker than expected at an annualised rate of 1.6%. This was lower than both consensus expectations—which called for a 2.2% increase—and the previous quarter’s gain of 3.4%, Lin observed.

He stressed, however, that the reading isn’t too concerning, as a key reason why GDP missed expectations was because of an increase in imports. “Imports tend to be very, very hard to forecast, as they’re often pretty volatile,” Lin explained, noting that the import numbers could be revised in future Q1 GDP estimates. Moreover, at the end of the day, a 1.6% growth rate is still decent, he said.

Lin added that beyond the headline GDP number, there are other measures of consumer demand in the report that can also provide clues on how the economy is trending. One of these measures, consumer spending, rose by 2.5% during the first quarter, he said. “Even though the 2.5% increase is a moderation from the fourth quarter, it still represents a healthy increase in consumer spending overall,” Lin remarked.

Next, Antal-Gilbert asked Lin what his expectations are for European first-quarter growth numbers, which will be published the week of April 29. Lin said that based on recently released flash PMI (purchasing managers’ index) surveys, which often serve as leading economic indicators, he thinks the GDP numbers in the eurozone might show some improvement.

“The PMI readings, coupled with some positive data around European bank lending and credit activity, suggest that growth may start to rebound a little bit, which would be a welcome change from 2023,” Lin stated.

U.S. inflation comes in hotter than expected

The conversation shifted to U.S. inflation, with Lin noting that the core PCE (personal consumption expenditures) price index—the Fed’s preferred inflation gauge—came in slightly hotter than expected for the first quarter. “Analysts were expecting a 3.4% increase, but core prices actually rose by 3.7%,” he remarked, noting that the report helped spark a selloff in the U.S. bond market.

While the PCE inflation number was disappointing, Lin stressed it wasn’t anything new. Case-in-point: the last three CPI (consumer price index) reports have all been somewhat hotter than anticipated, he said. “While the PCE number certainly isn’t helpful, I still think it’s reasonable to expect that U.S. inflation rates will continue to moderate the rest of the year. We’ve always known that the road to disinflation was going to be a challenging one, and that the path to achieving the Fed’s 2% goal wouldn’t be linear, but I do think inflation will move closer and closer to the central bank’s target,” Lin stated.

He finished by noting that he believes the Fed will still be able to cut rates later this year, emphasising that the timing of the first rate cut will be highly data-dependent.

Q1 earnings season update

Antal-Gilbert and Lin concluded with an update on U.S. first-quarter earnings season, which Antal-Gilbert noted is about halfway complete. Lin characterised the results so far as a mixed bag, saying that on the one hand, there’s been pretty decent results from U.S. mega cap companies like Google and Microsoft. On the other hand, however, earnings growth from S&P 500 companies as a whole is still contracting slightly on a year-over-year basis, he said.

“Overall, first-quarter earnings season isn’t painting too bad of a picture. Companies are generally still in good shape, with corporate balance sheets still looking relatively healthy,” Lin remarked, adding that he’s not too concerned with the results so far.

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