US economy expands by 1.6% in first quarter, below expectations as inflation rises

The US economy grew at its slowest pace in nearly two years last quarter, sparking concerns among investors and economists. The Bureau of Economic Analysis’s advance estimate of first quarter US gross domestic product (GDP) showed the economy grew at an annualized pace of 1.6%, missing the 2.5% growth expected by economists. This reading was significantly lower than the fourth quarter GDP, which was revised up to 3.4%.

One of the key factors contributing to the slower growth was the higher than expected inflation rate. The “core” Personal Consumption Expenditures index, which excludes food and energy categories, grew by 3.7% in the first quarter, above estimates and significantly higher than the previous quarter.

Economists are now closely watching the Federal Reserve’s next moves, as they try to determine when interest rates will be cut. The surprise rise in inflation has led to speculation about the central bank’s ability to achieve a soft landing without causing a significant economic downturn.

Despite the disappointing GDP numbers, some economists remain optimistic about the underlying strength of the economy. They believe that areas like inventories and exports, which weighed on GDP growth in the first quarter, will rebound in the next quarter.

However, the rise in inflation has already had an impact on the markets, with the 10-Year Treasury yield reaching above 4.7% for the first time since November 2023. All three major indexes saw a decline after the data release, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all dropping more than 1%.

Overall, while the slower growth in GDP may raise some concerns, economists are hopeful that the economy will bounce back in the coming quarters. The focus now shifts to how the Federal Reserve will respond to the latest economic data.