Higher Rock Education - Economics Blog

Friday, April 26, 2024

Real Gross Domestic Product – Advance Estimate 1st Quarter 2024

The US economy decelerates by 1.6%, but growth in consumer spending fuels higher prices.  

The Bureau of Economic Analysis’s news release Gross Domestic Product, First Quarter 2024 (Advance Estimate) highlights are summarized below.

  • The US economy’s growth rate rose to an annual rate of 1.6% in the first quarter, following a robust 3.4% surge in the fourth quarter. This marks the seventh consecutive quarter of growth.
  • Consumer spending remained the economy’s primary driver, increasing at an annual rate of 2.5%, down from the 3.3% pace observed in the fourth quarter of 2023.
  • Gross private investment rose at an annual rate of 3.2% after a mere 0.3% uptick in the previous quarter.
  • Government spending slowed from an annual clip of 4.6% in the 2023’s final quarter to 1.2% in the first quarter of 2024.
  • Exports rose slightly, while imports surged, resulting in a net decrease in exports and a drag on real gross domestic product.
  • Inflation, as measured by the PCE price index, accelerated from 1.8% in the fourth quarter to 3.4% in the first quarter.
  • The core PCE price index, which excludes volatile energy and food prices, had a substantial increase of 3.7% in the first quarter, up from 2.0% in the fourth quarter.

The substantial drop in the economy’s growth might misleadingly indicate a cooling trend and a potential easing of inflationary pressures. However, consumers persist in spending at a heightened rate, and prices continue to escalate at an unacceptable pace. Without a significant surge in imports and a reduction in inventories, growth would have been nearly equal to last quarter’s performance.

Spending patterns shifted from goods to services during the first quarter. While spending on goods rose by 3% in the previous quarter, it dipped by 0.4% in the first quarter. Higher interest rates contributed to a nearly $14 billion decline in motor vehicle sales. Falling gasoline prices also helped reduce spending on goods. However, buoyed by higher incomes, consumers continued to increase their spending on services. A robust labor market supported much of the growth from the previous quarter, with payrolls expanding and increases in disposable income outpacing inflation. Real disposable personal income increased by 1.1% in the first quarter, compared to a 2.0% increase in the final quarter of 2023. Consumers continue to be optimistic, according to the sentiment index published by the University of Michigan.

A 1.2% increase in government spending contributed less than a quarter percent to the quarter’s growth. The federal government cut spending for national defense, and state and local governments decelerated their spending.  

Residential spending surged by 13.9% in the first quarter, although activity in residential investment, measured in real dollars, has yet to fully recover since its decline began in the third quarter of 2022. This significant increase in residential activity helped boost business investment by 3.2%—however, a substantial reduction in inventories restrained business growth. Nevertheless, falling inventories may signal future growth, as businesses eventually need to invest to replenish their stocks.

Exports slowed while imports surged, both contributing to a reduction in net exports. This reduction in net exports decreased RGDP growth by nearly one percent. Economists anticipate the balance of exports and imports will improve as the recovery of world economies aligns with that of the US.

Despite the modest 1.6% overall growth, economists monitor final sales to private domestic purchasers to gauge domestic demand, as it excludes inventory changes, trade, and government spending. These sales, which increased by 3.1%, fail to reflect a slowdown, helping to explain the resilience of inflation. The PCE price index, favored by most economists as a measure of inflation, rose by 3.4% in the first quarter, compared to a 1.8% increase in the fourth quarter. The core index also accelerated from 2.0% to 3.7%, marking the first rise in both measures in a year.

The sharp increases in the PCE price indexes will draw the attention of policymakers at the Federal Reserve during their upcoming meeting. With inflation remaining unchecked, the anticipated reduction in interest rates will likely be delayed. While a healthy labor market, increased business profits, and a growing economy are positive indicators, they also postpone the return of inflation to the Fed’s 2% target. The BEA’s Personal Income and Outlays - March 2024 report was released earlier today. Stay tuned for Higher Rock’s summary and analysis of the news early next week.

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