Economic growth in the United States slowed more than expected during the first quarter with a hot inflation reading dampening interest rate cut hopes.
Gross domestic product (GDP) increased by 1.6% in 1Q, economists from the Commerce Department said on Thursday, far below the 2.5% expected by analysts.
This comes after GDP rose 3.4% in the fourth quarter of 2023.
Analysts at Bank of America Securities believe the economy remains on solid footing but “can’t catch a break on inflation.”
They highlighted that the largest drags on growth came from trade and inventories, volatile categories where large swings tend to be reversed in the subsequent quarters.
“We tend to focus on final sales to domestic purchasers, which grew at a solid 2.8%, compared to 3.5% in the second half of 2023,” they wrote.
“The bottom line is that the economy moderated somewhere in the first quarter, but it remains on solid footing overall.”
They wrote that the biggest surprise in the GDP data release came from the Personal Consumption Expenditure (PCE) inflation reading.
“Today's inflation release was unambiguously bad news for the Fed,” they wrote.
The PCE price index rose 3.4%, up from 1.8% in the 4Q. Excluding food and energy prices, the “core” PCE rose 3.7%, compared to a 2% increase in the previous quarter and ahead of estimates of 3.4%.
The analysts wrote that the hotter-than-expected PCE appears to come from services, specifically transportation services, financial services and insurance.
US stocks moved lower following the report, with the Dow Jones down 0.8%, the Nasdaq down 0.5% and the S&P 500 down 0.3% shortly before the closing bell on Thursday.