US Real GDP Growth Eases Up Slightly April 25, 2024

After real GDP growth beat expectations by a wide margin in the second half of last year, the 1.6% gain revealed today shows the US economy is growing at a more normal pace that better reflects the high interest rate environment. The uptick also came in below the consensus forecast of 2.4%, and is the weakest quarterly growth since the declines experienced in early 2022.

That said, the US economy is still doing well. In fact, final domestic demand grew by an annualized 2.8%, which isn't exactly a sign of a struggling economy. The pickup in real personal spending on services is particularly noteworthy. It advanced 4.0%, its best quarterly performance since the summer of 2021. This helped offset some softness in durable and nondurable goods (-1.2% and 0%, respectively). Real business investment also ramped up, especially in equipment and intellectual property products. In addition, residential investment jumped 13.9%, the sharpest rise since the end of 2020. However, government spending has slowed.

Strong domestic demand also buoyed real imports, which posted their biggest annualized gain in two years (7.2%). This is in sharp contrast to the modest 0.9% growth in real exports. To meet domestic demand, businesses also accumulated less inventory. The fluctuations in net exports and inventories shaved 1.21 percentage points off real GDP growth. This explains the difference between the upsurge in final domestic demand and weaker real GDP growth.

It's also interesting to note that total PCE inflation stayed on a downtrend, slipping from 2.8% in the fourth quarter of 2023 to 2.6% in the first quarter of 2024. But hidden behind the decline is faster annualized quarterly growth, with the total PCE deflator climbing from 1.8% to 3.4% and the core deflator, which strips out food and energy, rising from 2% to 3.7%. This acceleration, which can already be seen in CPI data, will probably convince the Fed to wait several months before it starts cutting rates.