US GDP slows down, but 1st quarter inflation renews pessimism about interest rates

Although US GDP growth lost speed in the 1st quarter of 2024 – the data showed an annualized increase of 1.6% in the period, compared to a variation of 3.4% in the last quarter of last year -, core inflation PCE came in higher than expected and this tends to keep economists pessimistic about the possibility of the Federal Reserve cutting interest rates in the short term.

US Treasury Secretary Jante Yellen tried to play down the price surprise. For her, progress in reducing inflation was not hampered in the first three months of the year. Yellen believes that other areas of the economy, such as the job market, will not need to weaken for inflation to return to the Fed’s 2% target. “To me, the data says we are on a downward trajectory for inflation,” states.

She preferred to highlight the strength of consumer spending and investments in the quarter. “These two elements of final demand were in line with last year’s growth rate. So this is the underlying strength of the U.S. economy, which has shown continued robust strength and an economy firing on all cylinders.”

Claudia Rodrigues, economist at C6 Bank, in turn, highlights that the GDP data was below what the market expected (2.5%), but the composition of the indicator continued to show that both household consumption and investments remained strong.

“Despite the economy having produced less during the period, domestic consumption continues to be strong in the USA. A possible explanation is the replacement of consumption of domestically made products with imported ones, as the dollar is stronger globally,” he explains.

According to her, another piece of data that caught attention among those released today was the core PCE calculated by the Department of Commerce. “The index (3.7%) was above market projections (3.4%) and the previous period (2.0%), indicating that prices remain under considerable pressure.”

Thus Claudia states that, although the Fed indicated at the last meeting that it could promote three interest rate cuts by the end of 2024, the possibility of no interest rate reduction this year has increased.

For Leonardo Costa, economist at ASA Investments, the surprise rise in the PCE indicates resistance in core inflation, but he considers that it is not yet possible to determine whether this surprise was due to revisions of the data in January or February, since disclosure is quarterly.

“In general, GDP has a weaker pace in consumption and government spending. And, on the inflation side, there is resistance in the deceleration of the cores”, he states, highlighting that the so-called “last mile” is difficult to achieve, in a worse scenario for inflation in the United States.

In the view of André Nunes de Nunes, chief economist at Sicredi, the increase in the price index indicates a possible bad scenario, since there was frustration with the growth data in the quarter while inflation remains high.

“This tends to pose a more complex scenario for the Fomc next week. Until then, what was observed was a slowdown in inflation, with strong activity. We believe that it does not change the decision to maintain (interest rates), but the statement may bring new signals about future movements.”

Contradictory signals

Danilo Igliori, chief economist at Nomad, assesses that the first GDP estimates for the first quarter of 2024 in the USA brought contradictory signals. “On the one hand, the activity indicator points to a considerable slowdown compared to what was observed at the end of last year. On the other hand, the inflation figures accompanying the report are strong and reinforce doubts about the prospects for the beginning of the cycle of interest rate cuts,” he explains.

For him, ultimately, this situation raises an alert for possibilities of so-called stagflation. “The main American stock market indexes fell after the release, also pressured by responses to corporate results and guidance from large companies.”

Therefore, the economist warns that all attention will now be focused on the release of the PCE tomorrow. “If the March PCE signals an inflation trajectory towards the 2% target, the speech may lose part of the ‘hawkish’ tone” recently adopted. Otherwise, hopes for cuts in 2024 will suffer another blow. The only certainty at this moment is that there will be no shortage of emotions in the days leading up to the next Fomc meeting”, he ponders.

(With Reuters)