U.S. economic growth picked up in the first quarter on a rebound in government spending, but the increase is likely temporary as the drives up gasoline prices and squeezes household budgets.
Gross domestic product increased at a 2.0% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said in its advance GDP estimate on Thursday. Economists polled by Reuters had forecast GDP growth increasing at a 2.3% annualized rate. Much of the growth came from a partial reversal in government outlays.
Meanwhile the U.S. Commerce Department said on Thursday its Personal Consumption Expenditures Price Index (PCE) rose in line with expectations in March, the latest sign that inflation remained relatively well behaved despite the war with Iran. March PCE rose 3.5% year over year, matching the consensus estimate, while rising 0.7% from February, also matching estimates. The core PCE price index, excluding volatile food and energy prices, rose 0.3% as expected.
MARKET REACTION:
STOCKS: U.S. major indexes were set to open higher, with futures tracking the Dow Jones Industrial Average (.DJI) up 0.7%.
BONDS: Treasury securities rallied on Thursday morning, with the yields on the 2-year and 10-year Treasury notes falling. The 2-year note was down 6 basis points to 3.89% and the 10-year note was off 3 basis points to 4.38%.
FOREX: The dollar index was off 0.4% to 98.50.
COMMENTS:
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK:
“Well, 2.0% GDP was a rebound from the low growth rate in Q4, which was mostly due to the government shutdown. The first quarter suggests that we're probably going to average 2.5% for the year, is solid growth, but certainly nothing that you can describe as extreme. It’s basically the average GDP growth that we've had for the past four to five years.
“Personal spending came in better than expected, and it shows that the consumer remains resilient. That's subject to change, of course, if energy prices continue to rise.
“Headline and core year-on-year inflation above 3.2% is obviously a negative. And most of it, of course, is due to energy prices. For now, we can label it as transitory. However, if the war continues and energy prices do not come down from the present levels, that transitory inflation will become constant inflation and certainly a major headache for the Federal Reserve.”
MICHAEL LORIZIO, HEAD OF US RATES AND MORTGAGE TRADING AT MANULIFE INVESTMENT MANAGEMENT, BOSTON;
“The U.S. data this morning was mixed but probably validates the Fed's stance yesterday of a little bit of a hawkish turn or a hawkish leaning compared to the previous meeting. I would not be leaning into any of the communication that a hike is in anyone's immediate forecast, but some more balanced view and more just a commitment to looking at how the economic data comes in from here on out.
“Today was a big first step in that and seeing how measured inflation from their preferred measure looks and core PCE obviously being as expected, but materially higher than where the Fed would like to see it. It was already materially higher pre the conflict in Iran and this is just accelerating that.”
“On the flip side, jobless claims hitting such low levels and continuing claims hitting low levels… there's reason for the Fed to continue to have concerns there, and this doesn't take that away, but there's no ammunition here for the Fed to continue to talk about near-term cuts. And that I think was the purpose of their change in messaging yesterday, or the dissenters' push for a broader change in messaging.”
BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:
"High growth isn’t always healthy growth. Half a percentage point of GDP growth came from computers and another half from healthcare. It’s not a shaky foundation for growth, but not the most solid either."
