US economy slows amid import surge; inflation accelerates

The US economy witnessed its slowest growth in nearly two years during the first quarter, largely attributed to a surge in imports and a modest accumulation of unsold goods at businesses, Reuters reported.

Despite signs of strong demand, including an uptick in inflation, experts suggest that the Federal Reserve is unlikely to consider interest rate cuts before September.

According to the Commerce Department's report on first-quarter gross domestic product (GDP), the economy expanded at a 1.6 per cent annualised rate, falling short of economists' expectations.

Add WION as a Preferred Source

However, this figure may overstate the moderation in economic activity, as underlying indicators like domestic demand remained strong.

Consumer spending, albeit slightly tempered, along with increased business investment and an expanding housing market, indicated the economy's resilience.

Reuters cited Daniel Vernazza, chief international economist at UniCredit, who noted the implications of the GDP report, saying that while the Federal Reserve may perceive it as solid, the unexpected rise in inflation could reinforce the central bank's decision to delay rate cuts.

Economists polled by Reuters had forecasted a GDP growth rate of 2.4 per cent, with estimates ranging from 1.0 per cent to 3.1 per cent.

The GDP expansion in the first quarter marked a slowdown from the previous quarter's growth rate of 3.4 per cent.

Notably, the growth pace fell below the non-inflationary threshold of 1.8 per cent as regarded by US central bank officials.

However, excluding volatile components such as inventories, government spending, and trade, the economy grew at a healthier rate of 3.1 per cent, dispelling notions that government expenditure was solely driving economic momentum.

Treasury Secretary Janet Yellen said that her focus was on consumer and business spending, indicating their alignment with last year's growth rates.

This highlights the underlying strength of the US economy, characterised by strong consumer and business activities.

Inflationary pressures intensified during the first quarter, with the PCE price index, excluding food and energy, surging at a rate of 3.7 per cent.

This marked an acceleration from the previous quarter's pace of 2.0 per cent.

Rising costs in services like transportation and housing offset declines in goods prices, contributing to the inflationary surge.

Despite concerns over a potential slowdown, the labour market remains resilient.

Weekly jobless claims declined, indicating stability in the employment landscape.

Low layoffs continue to sustain high wages, supporting consumer spending, a crucial driver of economic activity.

However, recent data suggests that lower-income households are relying more on debt to fund purchases, indicating potential challenges ahead.

While income increased in the first quarter, gains were windswept by inflation and higher taxes, resulting in a slower pace of growth in disposable income.

The saving rate decreased slightly, reflecting adjustments in household finances while economic conditions continue to change.

Business spending witnessed an uptick, particularly in investments related to artificial intelligence, offsetting declines in government outlays.

The widening trade deficit, with reduced inventory accumulation, posed challenges to GDP growth.

Imports satiated part of the increased spending, contributing to a wider trade deficit.

Despite a slowdown in government spending, business investments and residential construction remained strong, indicating diverse drivers of economic activity.

(With inputs from Reuters)