THE Economic Analysis Office announced today that U.S. real GDP, seasonally adjusted, grew at an annual rate of 1.6% in the first quarter. That’s a bit lower than many analysts expected. But year-over-year growth is still on track.
Top panel: Quarterly real GDP growth at an annual rate, 1947:Q2-2024:Q1, with the historical average (3.1%) in blue. Calculated as 400 times the difference in the natural logarithm of real GDP from the previous quarter. Lower panel: year-over-year growth rate. Calculated as 100 times the difference in the natural logarithm of real GDP from the same quarter of the previous year.
The new figures put the Econbrowser Recession Indicator Index at 2.0%, a very low level, unambiguously indicating the continuation of the economic expansion that began in the third quarter of 2020.
Recession indicator index based on GDP. The value plotted for each date is based only on GDP figures that were publicly available one quarter after the date shown, with 2023:Q4 being the latest date shown on the chart. Shaded regions represent NBER recession dates, dates which were in no way used in the construction of the index.
A key factor in the lower GDP growth has been increased imports, which are subtracted in the GDP calculation. Import estimates are volatile and may be subject to revision.
Residential fixed investment made a good contribution to GDP growth in the first quarter, despite high interest rates. Mortgage rates fell between November and February, but have since partially risen again.
The explanation for the recent rise in mortgage rates is that the Fed has not made as much progress in reducing inflation as many hoped. The new GDP report is also a little disappointing. The implied PCE deflator increased at an annual rate of 3.3% in the first quarter. The one-year interest rate was 2.5%, slightly better than the quarterly increase, but still above the Fed’s 2% target.
Top panel: 100 times the difference in the natural log of implicit price deflator for personal consumption expenditure compared to the same quarter of the previous year. Lower panel: 400 times the difference in the natural logarithm of the PCE deflator from the previous quarter’s value.
The lack of further progress on inflation has led to a significant shift in market expectations regarding the Fed’s next steps. At the beginning of December 2023, the future contracts For December 2024, the federal funds rate was 4.3%, consistent with four 25 basis point reductions in the federal funds rate this year. Currently, the contract implies a rate of 5% in December. Traders now expect just one drop, and that won’t come until later in the year.
Several supply-side factors are also likely to push up the inflation rate. The two presidential candidates appear to be competing to see who will raise the prices of imported goods the most. Geopolitical risks could lead to higher energy prices. And measures like California’s $20 minimum wage for fast food workers can’t help.
It appears the Federal Reserve has achieved the coveted “soft landing,” reducing inflation without a recession. But I have to admit that the plane is not quite on the ground yet.
