First Quarter Economic Growth Revised Downward on Weaker Consumer Spending | Economy

Consumer spending slowed in the first quarter, bringing economic growth down to a 1.3% annual rate, the Bureau of Economic Analysis said as it released its second estimate of gross domestic product on Thursday.

The number matched forecasts and is down from the advance estimate of 1.6%. The economy expanded by 3.4% in the fourth quarter.

“With the second estimate, downward revisions to consumer spending, private inventory investment, and federal government spending were partly offset by upward revisions to state and local government spending, nonresidential fixed investment, residential fixed investment, and exports. Imports were revised up,” the BEA said.

“Momentum is slowing as consumers struggle with lingering inflation pressures,” said Jeffrey Roach, chief economist at LPL Financial. “A bright spot in the macro landscape is business investment as firms continue to invest in new technologies. We should expect inventory investment to have a small rebound in the current quarter and investors should expect slower momentum in consumer spending to continue throughout the balance of 2024.”

The release was in line with other reports that show consumers balking at higher prices and seeking discounts. Major retailers such as Target and Walmart have recently announced price decreases across a wide range of products.

The survey of regional Fed bank districts said that, “Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks.”

The markets have cooled as they adjust to the reality that cuts in interest rates from their two-decade highs will not be coming anytime soon. Dow Jones Industrial Average futures were off by about 300 points early Thursday following a 400-point loss on Wednesday.

“I think this is just a pause,” says Anthony Saglimbene, chief market strategist at Ameriprise Financial, of the market’s recent swoon. “We’ve come a long way fast.”

While acknowledging that “many, many points of inflation have already come down,” he says that the Federal Reserve will need to see “several more months of inflation coming down” before cutting rates.

Current forecasts for second-quarter economic growth are running in the 3.5% range, and mutual fund giant Vanguard said this week its own data suggests hiring may be picking up.

“Vanguard’s proprietary data on enrollments in 401(k) retirement plans point to an uptick in the pace of hiring,” the firm said. “The hires rate – which refers to new hires as a share of existing employees – reached 2.8% in April 2024, up from 2.4% in March 2024 and at its highest level since October 2022.”

In particular, Vanguard says gains will be strongest for lower-income workers as companies continue to be more cautious about higher-end hires.

“While demand for low-paid workers remains elevated relative to pre-COVID-19 levels, hiring activity in higher-paying occupations continues to moderate,” said Adam Schickling, a senior Vanguard economist. “This is partly a reflection of lower-paying service industries still trying to recover from the COVID shock – a challenge since many of those workers have transitioned to higher-paying opportunities. Nonetheless, it’s clear that higher-paying industries are taking a considerably more cautious approach to hiring relative to the hectic 2021 to 2022 hiring surge.”

Just how much of an effect higher interest rates are having on the economy can be seen in the housing sector.

The National Association of Realtors said Thursday that pending home sales fell 7.7% in April, way more than the 0.1% drop expected by economists. Year over year, sales are off by 7.4%.

All regions of the country saw declines, with the Midwest and West experiencing the sharpest declines.

“The impact of escalating interest rates throughout April dampened home buying, even with more inventory in the market,” said NAR Chief Economist Lawrence Yun. “But the Federal Reserve’s anticipated rate cut later this year should lead to better conditions, with improved affordability and more supply.”