Finance
US first quarter GDP slows more than expected, but inflation keeps rising
The economy is still solid, but growth is slowing, the latest GDP reading shows. (iStock)
U.S. gross domestic product (GDP) dropped faster than expected in the first quarter, but a key metric used by the Federal Reserve to measure inflation kept rising, according to the Bureau of Economic Analysis (BEA).
Real GDP increased at an annual rate of 1.6% for the January-through-March period after rising 3.4% in the fourth quarter of 2023, according to the Bureau of Economic Analysis (BEA) advance estimate released Thursday. Economic forecasts had called for a deceleration of growth over the previous month, with the expectation that the economy would expand by 2.4%, according to a Reuters report.
Compared to the fourth quarter, the deceleration in real GDP in the first quarter primarily reflected decelerations in consumer spending, exports and state and local government spending and a downturn in federal government spending. This slowdown was partly offset by an acceleration in residential fixed investment.
“We knew the economy was weaning itself off government support, we just didn’t figure that would cause GDP to drop this quickly,” said Robert Frick, Navy Federal Credit Union corporate economist. “With government spending down and consumer spending moderating as Covid-era supports disappear, GDP fell below all estimates.
“But consumers continue to spend at a healthy rate, especially as evidenced by big spending on imports, which drove down the topline GDP number,” Fick continued. “First quarter GDP is often squirrelly and heavily revised – just look at last year’s – so all-in-all, this shouldn’t be taken as a fundamental downshift in the economy.”
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Federal Reserve is in no hurry to cut rates
A slower economy is not likely to accelerate the timeline for interest rate cuts since core inflation continued to rise.
The personal consumption expenditures (PCE) price index, excluding food and energy prices — a key metric the Federal Reserve tracks to measure inflation — increased by 3.7% after rising to 2% in the fourth quarter.
“Inflation will likely resume its downward trend, slowly inching toward the Fed’s 2% target,” CoreLogic Chief Economist Selma Hepp said. “But, until the Fed gains greater confidence in the downward direction of inflation, it is not likely to lower rates and overall investments in the housing sector will stay tepid, as a result.”
Since July, the central bank has kept its policy rate in the 5.25% to 5.5% range. Following its March meeting, Fed Chair Jerome Powell said that interest rate cuts were still on the table for this year, but the central bank revised projections of rate cuts to just three this year. Powell said that the Fed remained committed to bringing inflation down to a 2% target rate and warned that lowering rates too soon would risk bringing inflation back while holding back too long posed a risk to economic growth.
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Americans are less worried about inflation, recession risks
Higher interest rates and borrowing costs have dampened consumers’ spending on bigger-ticket items like housing and cars. However, Americans have largely gotten used to higher prices and feel better equipped to handle their finances, according to a recent Santander survey.
Additionally, worries about an economic recession have taken a backseat for many Americans as they begin to accept the high-interest rate environment as the new normal. The number of respondents who expected a recession in the next 12 months dropped from 69% to 60%.
However, consumers have had to make deep budget cuts to survive in a high-cost environment – 67% of respondents said they cut out significant purchases such as vacations, vehicles and home repairs, according to the survey.
“While middle-income households have had to navigate higher prices due to inflation, it is encouraging to see consumers taking positive steps to manage their finances and adjust their household budgets,” Santander CEO Tim Wennes said.
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Walmart stock may be a steal.
Former Walmart U.S. CEO Bill Simon contends the retailer’s stock sell-off tied to a slowing profit growth forecast and tariff fears is creating a major opportunity for investors.
“I absolutely thought their guidance was pretty strong given the fact that… nobody knows what’s going to happen with tariffs,” he told CNBC’s “Fast Money” on Thursday, the day Walmart reported fiscal fourth-quarter results.
But even if U.S. tariffs against Canada and Mexico move forward, Simon predicts “nothing” should happen to Walmart.
“Ultimately, the consumer decides whether there’s a tariff or not,” said Simon. “There’s a tariff on avocados from Mexico. Do you have guacamole with your chips or do you have salsa and queso where there is no tariff?”
Plus, Simon, who’s now on the Darden Restaurants board and is the chairman at Hanesbrands, sees Walmart as a nimble retailer.
“The big guys, Walmart, Costco, Target, Amazon… have the supply and the sourcing capability to mitigate tariffs by redirecting the product – bringing it in from different places [and] developing their own private labels,” said Simon. “Those guys will figure out tariffs.”
Walmart shares just saw their worst weekly performance since May 2022 — tumbling almost 9%. The stock price fell more than 6% on its earnings day alone. It was the stock’s worst daily performance since November 2023.
Simon thinks the sell-off is bizarre.
“I thought if you hit your numbers and did well and beat your earnings, things would usually go well for you in the market. But little do we know. You got to have some magic dust,” he said. “I don’t know how you could have done much better for the quarter.”
It’s a departure from his stance last May on “Fast Money” when he warned affluent consumers were creating a “bubble” at Walmart. It came with Walmart shares hitting record highs. He noted historical trends pointed to an eventual shift back to service from convenience and price.
But now Simon thinks the economic and geopolitical backdrop is so unprecedented, higher-income consumers may shop at Walmart permanently.
“If you liked that story yesterday before the earnings release, you should love it today because it’s… cheaper,” said Simon.
Walmart stock is now down 10% from its all-time high hit on Feb. 14. However, it’s still up about 64% over the past 52 weeks.
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Investors may want to reduce their exposure to the world’s largest emerging market.
Perth Tolle, who’s the founder of Life + Liberty Indexes, warns China’s capitalism model is unsustainable.
“I think the thinking used to be that their capitalism would lead to democracy,” she told CNBC’s “ETF Edge” this week. “Economic freedom is a necessary, but not sufficient precondition for personal freedom.”
She runs the Freedom 100 Emerging Markets ETF — which is up more than 43% since its first day of trading on May 23, 2019. So far this year, Tolle’s ETF is up 9%, while the iShares China Large-Cap ETF, which tracks the country’s biggest stocks, is up 19%.
The fund has never invested in China, according to Tolle.
Tolle spent part of her childhood in Beijing. When she started at Fidelity Investments as a private wealth advisor in 2004, Tolle noted all of her clients wanted exposure to China’s market.
“I didn’t want to personally be investing in China at that point, but everyone else did,” she said. “Then, I had clients from Russia who said, ‘I don’t want to invest in Russia because it’s like funding terrorism.’ And, look how prescient that is today. So, my own experience and those of some of my clients led me to this idea in the end.”
She prefers emerging economies that prioritize freedom.
“Without that, the economy is going to be constrained,” she added.
ETF investor Tom Lydon, who is the former VettaFi head, also sees China as a risky investment.
“If you look at emerging markets… by not being in China from a performance standpoint, it’s provided less volatility and better performance,” Lydon said.
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