GDP Report Released
The Biden administration’s reelection campaign received a major blow as the first quarter GDP figures fell short of expectations, causing widespread concern over a potential inflationary environment. The anticipated growth rate of 2.4% was significantly lower than the actual increase of 1.6%, leading experts to draw parallels to the stagflation crisis of the 1970s.
In light of this news, the Federal Reserve’s admission that inflation is not only “sticky” but also trending adversely adds to the economic challenges facing the administration. The possibility of stagflation, a condition characterized by slow economic growth, high unemployment, and rising prices, is a cause for alarm as it could impact the administration’s chances of securing another term in office.
Fox Business News commentators weighed in on the GDP data, with David Asman noting the worrying historical parallel with the Carter administration. The 1.6% growth in the first quarter of 2024 was a significant deceleration compared to the 3.4% growth recorded in the previous quarter.
The key contributors to GDP growth were increased consumer spending, higher residential and nonresidential fixed investment, and more state and local government spending. However, these gains were offset by a decrease in private inventory investment and an increase in imports, which subtracted from the total GDP calculations.
The data also revealed a rise in consumer expenditure on services such as healthcare and financial services, but a decline in spending on goods like motor vehicles and energy products. Overall, the current-dollar GDP increased to $28.28 trillion, with the GDP price index and personal consumption expenditures (PCE) price index both rising, indicating heightened inflationary pressures. The PCE price index, excluding food and energy, increased to 3.7%.
Personal income also saw a notable increase, driven mainly by higher compensation and government transfer receipts. This led to an increase in disposable income despite higher personal taxes. However, the personal saving rate dipped slightly compared to the previous quarter.
The preliminary GDP estimate is set to be revised in a more comprehensive report to be released on May 30th. The report highlights the slowing of economic growth and the persistence of inflation, raising concerns about when the Federal Reserve might cut interest rates. The recent data showed that the U.S. could face a prolonged period of economic difficulty, which might require significant policy changes to prevent long-term damage.
The stock market reacted with a significant drop in major indexes following the release of the GDP data. The Dow Jones Industrial Average fell by 375.12 points, or 0.98%, with Caterpillar and IBM contributing to the decline. The S&P 500 and Nasdaq Composite also dropped by 0.46% and 0.64%, respectively.
The disappointing GDP results compounded fears raised by some tech companies’ earnings reports, leading to widespread unease among traders. Meta, the parent company of Facebook, saw a 10.5% drop in stock prices after issuing lower-than-expected revenue guidance for the second quarter. Similarly, IBM missed consensus estimates for first-quarter revenue, causing a decline of 8.3%.
The concerning GDP data raises uncertainty about the market’s direction, with the ongoing pullback in technology companies playing a significant role. The uncertainty is also reflected in the Fed funds futures, with the CME FedWatch Tool showing lowered expectations for interest rate cuts this year.
As major tech companies like Microsoft and Alphabet prepare to release their earnings, the effects of Meta’s report on market sentiment remain to be seen. The economic challenges facing the Biden administration and the potential for stagflation could further complicate matters for policymakers in the coming months.