The US economy grew at its slowest pace in nearly two years in the first quarter of 2024, with gross domestic product (GDP) increasing at a 1.6% annualized rate, lower than analysts' expectations of 2.4%. This marks a cool-down from the 3.4% growth seen in the previous quarter and is the slowest pace of growth since the second quarter of 2022. The slowdown is primarily attributed to moderation in consumer spending, a wider trade deficit, slower inventory accumulation by businesses, and a downshift in government spending. However, domestic demand remained solid, supported by business investment and a recovering housing market. Consumer spending, which accounts for about two-thirds of GDP, grew at a still-solid rate of 2.5%.
Inflation also flared up, with a measure of inflation in the economy increasing at a 3.1% rate, the highest in a year. Excluding food and energy, prices jumped 3.7%. The rise in prices has reinforced expectations that the Federal Reserve would not cut interest rates. The Federal Reserve is expected to leave its policy rate unchanged in the 5.25%-5.50% range. Despite the slower growth, the US economy is still expanding above the non-inflationary growth rate of 1.8% that US central bank officials regard as ideal.
The slower growth in the first quarter was attributed to moderation in consumer spending, a wider trade deficit, slower inventory accumulation by businesses, and a downshift in government spending. Consumer spending grew at a still-solid rate of 2.5%, driven by healthcare, financial services, and insurance. However, spending is expected to gradually cool this year as lower-income households have depleted their pandemic savings and are relying on debt. Government spending decelerated, and the trade deficit widened, both impacting GDP growth. Business spending picked up, particularly in artificial intelligence, while investment in nonresidential structures contracted for the first time in over a year. Residential investment recorded its fastest pace of growth since Q4 2020.
The combination of slower growth and increased inflation has raised concerns of stagflation. The slower growth was attributed to weaker data on trade and exports, which weighed down GDP growth by about 1.2 percentage points. However, economists pointed out that the details of the report showed underlying strength in the economy. The 'core' personal consumption expenditure index grew 3.7% in the first quarter, surpassing estimates and the previous quarter's gain. The release of the data has raised questions about when the Federal Reserve will begin cutting interest rates and whether it can achieve a soft landing when inflation falls to its 2% target without a significant economic slowdown. The surprise rise in inflation has led to an increase in the 10-year Treasury yield and a decline in the stock market. Overall, the report indicates mixed messages for the US economy, with slower growth and higher inflation.
Despite the challenges, Treasury Secretary Janet Yellen insists that the US economy continues to perform well. Job gains in the first quarter averaged 276,000 per month, and consumer spending is expected to continue supporting the economy. The International Monetary Fund recently upgraded its forecast for US growth in 2024 to 2.7% from 2.1% due to stronger-than-expected employment and consumer spending. Businesses have been taking advantage of lower mortgage rates and refinancing debt before the tightening cycle begins. Economic pressures could weigh on President Joe Biden as he seeks reelection. EY chief economist Gregory Daco predicts a gentle cooling of the economy due to slower labor demand, easing wage growth, stubborn inflation, and tight credit conditions. Since President Biden took office, prices have risen by 17.4 percent, resulting in a 4 percent decline in real wages and benefits. The Biden Administration has been blamed for the economic conditions, with critics pointing to burdensome regulations, stunted energy projects, tax hikes, reckless spending, and student loan forgiveness as factors contributing to slowed economic growth and high inflation.
US President Joe Biden acknowledges the need for more work in the US economy despite overall strong growth. The Q1 gross domestic product (GDP) report showed a slowdown to 1.6%, the slowest pace in two years, and a rise in the core PCE price index to 3.7% from 2% in Q4 2023. Biden highlighted the growth in the economy since he took office, with 3% growth over the last year and unemployment staying below 4% for more than two years. However, he emphasized the need to address high costs for working families and fight against 'hidden junk fees' imposed by airlines and banks. The Federal Reserve is concerned about rising inflation as it considers whether to cut interest rates. Mohamed El-Erian, chief economic advisor at Allianz, warns that the combination of weaker growth and higher inflation is problematic for the economy and markets. The Q1 GDP slowdown, along with downbeat Q2 guidance from Meta Platforms, led to a selloff on Wall Street and a climb in bond yields.
Despite the challenges in the US economy, Chipotle CFO Jack Hartung expects Americans to continue spending on Chipotle even as overall spending slows down. In the first quarter, US GDP growth expanded 1.6%, slower than expected. However, Chipotle's Q1 earnings report showed revenue growth of 14.1% to $2.7 billion, with same-store sales increasing by 7%. Limited-time offers like the carne asada bowl helped boost results. For 2024, Chipotle expects sales growth of mid- to high-single digits. Wall Street analysts believe Chipotle's value proposition and sales momentum will continue, with second-quarter same-store sales and traffic higher than the first quarter. Chipotle's Board of Directors has proposed a 50-for-one stock split, pending shareholder approval on June 6, to make the stock more accessible to retail investors. [0973e919]