LIVE UPDATES
The initial estimate for the U.S. economy's growth in the first quarter was revised downward due to decreases in consumer and equipment spending and a decrease in a key measure of inflation.
This keeps the Federal Reserve on track to potentially start reducing interest rates before the end of the year.
According to the Commerce Department's report on Thursday, the gross domestic product, which is the broadest measure of economic activity, grew at an annualized rate of 1.3% from January to March.
This is lower than the initial estimate of 1.6% and significantly slower than the 3.4% growth in the last quarter of 2023.
The first-quarter growth was downgraded due to recent weakness in retail sales and equipment spending.
The report revealed that consumer spending growth was revised down by 0.5 percentage point to a 2.0% annualized rate, mainly due to a larger-than-previously-reported decrease in household spending on goods. Spending on expensive durable goods such as motor vehicles and parts had the biggest negative impact on growth since the third quarter of 2021.
This drag on growth outweighed the upward revisions in the report to business and residential investment.
The measure of inflation for the first quarter has been revised down to 3.3% from 3.4%, marking the strongest quarterly price pressure growth in a year.
Despite easing for much of last year, inflation measures came in higher than anticipated at the beginning of 2024, leading Fed policymakers to delay expectations for when they can switch to interest rate cuts.
Following the slight downward revision to first-quarter inflation, U.S. Treasury yields decreased, and equity index futures reduced losses before the opening bell on Wall Street.
In April, a distinct report indicated that the trade deficit, the difference between exports and imports, increased to its highest level since May 2022, due to robust domestic demand for imports not being balanced by export trade.
The global head of market strategy at TradeStation,David Russell said "Both prices and consumption were subdued in the GDP report. Additionally, jobless claims exceeded expectations and the trade deficit expanded.
These figures collectively suggest a deceleration in growth and inflation. This sustains the possibility of a potential interest rate reduction."
Investors who are involved in contracts linked to the Fed's policy rate have slightly increased the likelihood that the central bank may start reducing rates in September, bringing it to nearly even odds.
The downward adjustment to GDP has brought the growth rate for the first quarter to its lowest level since the second quarter of 2022, when the economy contracted. This has left the output below the 1.8% rate, which is considered as the longer-term, noninflationary potential by Fed officials.
Although the start of the year was slow, it is not expected to have continued into the current second quarter, partly due to the ongoing strength in the job market.
While there was a slight increase in jobless claims, the underlying strength in the labor market indicates that it is likely to persist and continue to support the economy. Initial claims for state unemployment benefits rose to 219,000 for the week ended May 25, and continuing claims rose to 1.791 million during the week ending May 18.
The labor market is gradually adjusting following the Fed's interest rate hikes since March 2022. The level of layoffs remains relatively low overall, with the slowdown being more attributed to reduced hiring.
