First-Quarter 2024 National Accounts

The US economy is stronger than suggested by the “soft” 1.6% increase in GDP in the first quarter, while a sharp upturn of inflation puts Fed rate cuts on hold for at least several months.

Look to final sales to private domestic purchasers, not GDP, for a better indication of the economy’s underlying strength. The initial (“advance”) report of the national accounts for the first quarter of 2024 should be interpreted carefully. Looking beyond the headline figures, the economy’s underlying growth momentum was notably stronger than the disappointing figure of 1.6% quarterly GDP growth in the first quarter. GDP growth was held down by declines in components that tend to be more volatile --- inventories and net exports --- in contrast to solid growth in other components, including consumer spending and private investment. Personal consumption expenditures (PCE) posted solid growth (of 2.9%). Business fixed investment also rose 2.9%, while residential investment jumped 13.9%, continuing a recovery that began in the second half of 2024.

A more telling indicator of the US economy’s underlying strength is final sales to private domestic purchasers, which rose at a solid 3.1% annual rate in the first quarter, virtually identical to increases in the third and fourth quarters of 2023 of 3.0% and 3.3%, respectively. This is a clear if preliminary indication that the economy retains solid momentum for growth.

Together, declines in inventory investment and net exports subtracted 1.2 percentage points from GDP growth in the first quarter, but those components are not likely to continue to subtract large amounts from GDP growth on an ongoing basis, even though quarterly swings could be significant (in either direction) from time to time. The level of inventory investment ($35 billion in the first quarter) is broadly sustainable, suggesting that repeated large declines are not the most likely outcome. Net exports have been in a sideways waffle since the second half of 2022. Future large declines are possible if foreign demand were to collapse or the dollar were to appreciate sharply, but neither of those outcomes appear to be highly likely at this juncture. In short, the 3.1% growth in final sales to domestic purchasers is a better indicator of underlying strength in demand than the smaller 1.6% increase in GDP in the first quarter.

Of course, GDP and other estimates are subject to revision, so the picture of first-quarter growth could be altered in coming months.

Inflation surged in the first quarter, nearly eliminating any prospect for a Fed rate cut prior to this fall. Another major component in today’s report on the national accounts was a disturbing increase in consumer inflation. The price index for personal consumption expenditures (PCE) rose at a 3.4% annual rate in the first quarter, the largest increase since the first quarter of 2023. Meanwhile, the core PCE price index rose at an even higher 3.7% annual rate in the first quarter, far above the increase of 2.0% in the final two quarters of last year. This is a direct challenge to any hope that the Federal Reserve will begin to lower interest rates in coming months. As of the first quarter, the annual (four-quarter) increase in the core PCE price index was 2.9%. It is likely that tomorrow’s report on monthly PCE will show annual (12-month) inflation at or slightly above February’s 2.8% reading.

The Federal Open Market Committee (FOMC) will almost certainly not begin to seriously contemplate rate cuts without clear indications that inflation is easing and well on track to fall to 2% over time. The latest inflation figures suggest that progress on bringing inflation down has stalled. It will take more than one or two “good” monthly inflation reports to convince policymakers that it is appropriate to begin cutting interest rates. This makes any rate cut prior to this fall a low probability outcome and adds to the risk that there might not be any Fed rate cut in 2024.