Synopsis:

CIBC provides an analysis of the U.S. Q1 GDP figures, which showed a slowdown in economic growth, raising concerns about the pace of inflation and the potential timing of Federal Reserve policy adjustments.

Key Points:

• Q1 GDP Overview: The U.S. economy expanded at a 1.6% annualized rate in the first quarter of 2024, significantly below the consensus forecast of 2.5% and a decrease from the previous quarter’s 3.4% growth. This marks the first instance in a year and a half where growth has dipped below potential.

• Contributors to Slowdown: The GDP report highlighted several factors contributing to the slowdown, including a notable drag from net exports, which subtracted 0.9 percentage points from the growth rate due to weak exports and rising imports. Inventory adjustments also had a negative impact, reducing growth by 0.4 percentage points. Additionally, government spending and business investment growth decelerated during the quarter.

• Strengths in Domestic Demand: Despite broader economic softness, components of domestic demand showed resilience. Consumer spending continued to lead growth, increasing by 2.5%, although this was slightly below the expected 3.0%. Residential investment also saw an acceleration, underscoring continued strength in certain sectors of the economy.

• Inflation Concerns: The core Personal Consumption Expenditures (PCE) price deflator, a key indicator of inflation watched by the Federal Reserve, rose to 3.7% on a quarterly annualized basis, exceeding expectations and marking a significant acceleration from the previous quarter’s 2.0% rate. This higher-than-expected inflation figure may complicate the Fed’s policy path.

• Federal Reserve Policy Outlook: CIBC notes that the combination of cooling economic activity and higher inflation poses challenges for the Federal Reserve, which seeks sustainable economic cooling and abating price pressures before considering policy easing. CIBC anticipates that the Fed might observe the necessary conditions to adjust policy by September this year.

Conclusion:

The latest U.S. GDP figures indicate a more pronounced slowdown than anticipated, with inflation pressures remaining a concern. CIBC suggests that the Federal Reserve will proceed cautiously, potentially adjusting policy later in the year if economic conditions align with their objectives.