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The U.S. economy grew at a slower pace than expected at the beginning of 2024 as consumers pulled back on spending in the face of higher inflation. 

Gross domestic product, the broadest measure of goods and services produced across the economy, grew by 1.6% on an annualized basis in the three-month period from January through March, the Commerce Department said in its first reading of the data on Thursday. 

That is much lower than the 2.4% increase forecast by LSEG economists and marks a sharp slowdown from the 3.4% pace seen during the fourth quarter. It is the slowest pace of growth in two years.

“This was a worst of both worlds report – slower than expected growth, higher than expected inflation,” said David Donabedian, chief investment officer of CIBC Private Wealth US. “The biggest setback is the acceleration in core inflation, and in particular, the services sector rising above a 5% annual rate.”

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Consumer spending, which accounts for about two-thirds of GDP, moderated during the first quarter. It rose 2.5% for the period, down from the 3.3% figure recorded the previous quarter amid a steep pickup in inflation. 

An inflation gauge closely watched by the Fed rose 3.4% during the first quarter, the largest gain in a year. Excluding food and energy, prices jumped 3.7%. Both figures point to inflation that is still running well above the Federal Reserve’s 2% target.

“The economy will likely decelerate further in the following quarters as consumers are likely near the end of their spending splurge,” said Jeffrey Roach, chief economist at LPL Financial. “Savings rates are falling as sticky inflation puts greater pressure on the consumer.” 

He added: “We should expect inflation will ease throughout this year as aggregate demand slows, although the path to the Fed’s 2% target still looks a long ways off.”

The economy has remained solid even as experts predicted that the Federal Reserve’s aggressive interest rate hike campaign would send it spiraling into a recession. For all of 2023, the economy expanded 3.1%, up less than 1% in the previous year. 

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This is a developing story. Please check back for updates.

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