GDP disappoints and inflation high in Q1. But people have no reason to be freaked out

Today featured the first look at 1st Quarter GDP in the US. And given the strong job and spending growth reports that we've seen, it seemed to be another quarter of good overall growth.

So what did we get?

Dow Jones Industrial Average falls back after US GDP flubs expectations but inflation still hot https://t.co/TNqJOTgPbi #DowJones #Equities #GDP

— FXStreet News (@FXStreetNews) April 25, 2024

US GDP for the annualized first quarter grew by 1.6%, well below the forecast decline to 2.5% from the previous 3.4%. It represents the slowest pace of GDP growth since September of 2022, but an uptick in Core PCE in Q1 kicked the legs out from beneath rate cut hopes. Q1 Core PCE rebounded to 3.7%, climbing over the previous 2.0% and overshooting the forecast 3.4%. Headline PCE inflation also overshot, printing at 3.4% versus the previous 1.8% as inflation remains hotter than investors hoped.

Ugh. But then you look at the actual numbers and the components involved in the GDP print, and it doesn't seem too bad to me.

The increase in real GDP primarily reflected increases in consumer spending, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a decrease in private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

In fact, there was more home-building at the start of 2024 than at the end of 2023, and consumer spending growth stayed at a strong pace. It was only the trade and government sectors that caused the declines in GDP at the start of 2024.

The big jump in imports doesn't seem like a long-lasting drag, especially with more reshoring starting to happen in the country. I'd be a lot more concerned if consumer spending or home-building declined in Q1, but none of that happened.

The flip side of the report that spooked the markets was the inflation figures.

The personal consumption expenditures index, the Fed's preferred inflation gauge, rose at a 3.4% annual rate last quarter — much higher than the 1.8% in the fourth quarter of last year and the hottest print in a year.

The price index for gross domestic purchases — prices paid not just by U.S. consumers but also businesses and government agencies — rose at a 3.1% annual rate, up from 1.6% in the final months of 2023.

That led investors to further push back their expectations of when the Federal Reserve might cut interest rates and a new spike in bond yields. Two-year U.S. treasury yields rose 0.05 percentage points Thursday morning to a hair below 5% (4.995% as of 10:30am ET, to be precise).

But we already had indications inflation had risen in Q1. Two weeks ago, we got a third straight monthly reading of 0.3% or above, and the 3-month annualized increase of CPI was around 4.5%. So why would a 3.4% bump-up in the PCE index change what we thought our situation was?

Seems pretty stupid, and given that oil prices have leveled off in the last month, I'm not overly concerned with inflation running away to a higher level. I think it'll be more likely that it heads back toward the 2-3% level that we were at since last Spring.

Wall Streeters are still trapped in a 1970s mentality where inflation is caused by a lack of capacity and that it somehow cripples everything else. In reality, a lot of this will likely be one-time factors and "greedflation" where corporations tried to reset prices at the start of the year to hit the quarterly profit numbers. But reality-based or not, it caused a selloff on Wall Street today, and likely guaranteed a very bad April for the market, which is annoying in its own right.