Slowing growth and stable inflation: the latest review of the US economy shocked the markets

The latest review of the U.S. economy shook stock and bond markets with two potentially disappointing data: slowing economic growth and still steady inflation, The Wall Street Journal reports, UNN writes.

Details

US gross domestic product grew at a seasonally adjusted annualized rate of 1.6%, the Commerce Department reported on Thursday, a pullback from the rapid pace of the previous year. This lags behind the 2.4% forecast by economists polled by The Wall Street Journal.

Thursday's report also suggests that inflation, according to the Fed's preferred indicator, was likely higher than expected in March. This gives investors yet another reason to abandon the idea that the US Federal Reserve may start cutting interest rates in the coming months, the newspaper writes.

Typically, stunning economic growth numbers increase expectations that the Fed will cut interest rates. However, ongoing price pressures have made this prospect more difficult.

The inflation data triggered a bond sell-off, pushing the yield on the country's 10-year Treasury bonds above 4.7% for the first time this year. Meanwhile, U.S. stocks fell, with the Dow Jones Industrial Average dropping by more than 600 points.

Investors are now pricing in a nearly 20% chance that the Fed will keep interest rates steady through the end of the year, according to CME Group, up from less than 1% a month ago.

The report showed that American consumers are still "strong" after years of hiring and wage growth. According to the US Department of Commerce, spending on healthcare, insurance, and other services continued to rise. Underlying demand indicators remain robust and leading economists warn that the market has overreacted to individual data.

"The domestic economy is doing well," said Eugenio Aleman, chief economist at Raymond James. - "Prices were a little bit too high, but not much.

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Slower spending on goods such as cars and gasoline weighed on overall growth. Changes in business inventories and international trade also slowed growth last quarter, but economists warn that these figures could vary widely throughout the year.

"The decline in inventories could be really good news for the economy," said Teresa Ghilarducci, professor of economics at the New School for Social Research in New York. - "It bodes well for a surge in investment in the next quarter.

Excluding volatile food and energy prices, the US personal consumption price index rose by 3.7% year-on-year in the first quarter, beating expectations of a 3.4% increase. Economists have already revised down their expectations for price pressures in March following a separate inflation report earlier this month.

The increase implies that price pressures were again fierce in March and that the high inflation rates for January and February could be revised upward when the US Department of Commerce releases March inflation data on Friday.

"The stability of inflation in recent months has exacerbated the difficult challenge of an election year for President Biden, despite the promising economic outlook," the publication writes.

This, as indicated, also increased the likelihood that inflation could approach 3%, contrary to the Fed's 2% target.

Nevertheless, a number of federal data in recent weeks have shown that the US economy continues to struggle with the highest interest rates in 23 years, the publication writes.

In 2024, employers across the country increased staffing at a pace that exceeded Wall Street's projections. Economists say the influx of immigrants is boosting economic growth and tax revenues, even as it drains government resources. Credit card companies recently reported that customers are spending more than last year.

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