US GDP Plunges Amid Inflation Spike—Is a Recession Looming in 2024?

NAIROBI (Coinchapter.com) – US GDP and inflation report data highlight a decelerating US economy in the first quarter of 2024. Stubbornly high inflation remains a top concern, pushing the likelihood of an interest rate cut further into the year.

The Commerce Department reported an annualized growth rate of 1.6% for Q1, significantly lower than the 2.4% predicted by economists. This slowdown follows a 3.4% growth rate in the final quarter of 2023. The Federal Reserve’s aggressive interest rate hikes, implemented to rein in inflation, appear to be impacting economic activity.

Consumer Spending Moderates, Services Inflation Surges

Consumer spending, a critical driver of the US economy, exhibited moderation. An increase was primarily driven by services, offset by a decline in goods consumption. The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, surged 3.4%, marking a concerning acceleration from the 1.8% increase in the fourth quarter. Excluding volatile food and energy components, the core PCE price index soared 3.7%, nearly doubling the previous quarter’s 2.0% rise.

According to Olu Sonola, Head of US Economic Research at Fitch, “This report comes in with mixed messages. It is a downshift in economic growth, which confirms the trend of accelerating inflation. The hot inflation print is the real story in this report. If growth continues to decelerate slowly, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly out of reach.”

What Does This Mean for the Economy?

The latest GDP and inflation data paints a mixed picture of the US economy. While growth slowed, it remains positive, defying some predictions of a looming recession. The elevated inflation numbers, however, raise concerns about the Federal Reserve’s ability to achieve a “soft landing” – a scenario where inflation slows without triggering a sharp economic downturn.

The higher-than-expected inflation could force the Fed to maintain higher interest rates for longer. Elevated interest rates make borrowing more expensive for businesses and consumers, potentially further dampening economic growth. However, there’s still hope that inflation might be easing. Core PCE, which excludes volatile energy and food prices, shows a smaller increase, hinting that a broader slowdown in price rises could still be on the horizon.

Market Reaction and Expert Insights

The hotter-than-expected PCE inflation figures cast a long shadow over the GDP report. Olu Sonola, Head of US Economic Research at Fitch, notes that the report delivered mixed signals, showing slowing growth but accelerating inflation. He warns that fading growth paired with stubbornly high inflation raises the stakes for the Federal Reserve, making interest rate cuts in 2024 seem increasingly unrealistic.

“If growth continues to decelerate slowly, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach.”

Brian Jacobsen, Chief Economist at Annex Wealth Management, offered a somewhat more optimistic perspective. He remarked, “GDP growth was a miss, but the details were deja vu all over again when it comes to consumption spending. Services were up, but goods were down.” This suggests that consumers are still spending and just shifting their focus to experiences over material goods.

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