U.S. Economy Slows And Inflation Jumps, Damping Soft-Landing Hopes

U.S. economic growth slid to an almost two-year low last quarter while inflation jumped to uncomfortable levels, interrupting a run of strong demand and muted price pressures that had fueled optimism for a soft landing.

Gross domestic product increased at a 1.6% annualized rate, below all economists’ forecasts, the government’s initial estimate showed. A wider trade deficit subtracted the most from growth since 2022. The economy’s main growth engine—personal spending—rose at a slower-than-forecast 2.5% pace.

A closely watched measure of underlying inflation advanced at a greater-than-expected 3.7% clip, the first quarterly acceleration in a year, the Bureau of Economic Analysis report showed Thursday.

The figures represent a notable loss of momentum at the start of 2024 after the economy wrapped up a surprisingly strong year. With the inflation pickup, Federal Reserve policymakers—who were already expected to hold interest rates at a two-decade high when they meet next week—may face renewed pressure to further delay any cuts and even to consider whether borrowing costs are high enough.

Treasurys slid and stock futures fell, with traders pushing out the expected timing of the Fed’s first interest-rate cut to later this year.

The first-quarter pickup in inflation was fairly broad, including a 5.1% jump in service-sector inflation that excludes housing and energy, nearly double the prior quarter’s pace. March figures on inflation, consumer spending and income are due Friday.

Federal government spending subtracted from GDP for the first time in two years. Business inventories dragged for a second straight quarter.

Stripping out inventories, government spending and trade, inflation-adjusted final sales to private domestic purchasers—a key gauge of underlying demand—rose at a 3.1% rate.

The GDP report showed outlays for services rose by the most since the third quarter of 2021, fueled by health care and financial services. Spending on goods decreased for the first time in more than a year, restrained by motor vehicles and gasoline.

This article was provided by Bloomberg News.