Revised GDP Figures: What They Mean for Inflation Fears | Episode 138 | 05-30-24

In the realm of economics and financial markets, few indicators are as closely monitored as the Gross Domestic Product (GDP) figures. The GDP's initial estimate often sets the tone for market expectations, influencing investment decisions and policy considerations alike. This week on "Markets with Megan," we took an incisive look at the first quarter GDP revisions for 2024, and the implications were far from negligible.

The downgrade from 1.6% to 1.3% in economic growth might seem modest at a glance, but it reveals underlying currents that could sway the Federal Reserve's hand. A primary contributor to this downturn was the drop in personal consumption, with durable goods taking the hardest hit. This slowdown in consumer spending, which constitutes a significant chunk of the GDP, paints a concerning picture of economic vitality.

And, while service spending saw only a slight revision downward, and fixed investments experienced a small uptick, these were not enough to offset the reduction in personal consumption. Another point of interest was the rise in imports without a corresponding increase in exports, leading to a subtraction from GDP— a scenario not witnessed in the past couple of years.

What truly has investors on edge, however, is the stubborn core Personal Consumption Expenditures (PCE) price index, which has remained alarmingly close to its previous level, descending from 3.7% to 3.6%. Inflation, therefore, continues to loom large over the economic landscape, and the Federal Reserve's approach to balancing growth with inflation control remains in the spotlight.

We've already known that the first quarter of 2024 was off to a rocky start, and we got some of that validation today with the second reading on first quarter GDP. It is Thursday, may 30th, and this is your regular segment of Markets with Megan. We're going to discuss the reading that we got today from the GDP and break it down into what was revised lower. So, first of all, the first quarter was revised lower, from 1.6% growth in the advanced reading to 1.3% growth. Some of the weakness came from when you look in personal consumption Remember, the consumer makes up the majority of GDP, so we saw consumption be downgraded from 2.5% to 2%, and that was primarily led by durable goods. And then, from a service perspective, we did see just a modest downward revision to services. When you look at fixed investment, though so this includes non-residential CapEx spending as well as residential spending that actually moved slightly higher from 5.3% to 6%, but again, that downward revision to personal consumption outweighed that. We also saw an increase in imports from the first reading, and that means we're importing more goods. That is actually, if you import more than you export, that takes away from GDP. It subtracts from GDP. Since that was upgraded and the exports were not upgraded as much. We actually saw the first time in about two years that net exports actually subtracted from GDP. When you look at some of the other details, federal spending was a little bit weaker than was originally anticipated, specifically from the defense side, and then the inventory build was not as big this reading. When you look at the core PCE price index, though, this was what really concerned investors when the first reading came out it was up 3.7%. So definitely not what the Fed was looking for. It's basically unchanged. It still was up about 3.6%. So again a slower consumer.

Some concerns about inflation here. The equity market did not like this. Today we're seeing another sell-off here in the equity market. Bond yields are down slightly and that's primarily because this was a weak reading on GDP. We're still in the camp that the inflation is more of a concern than growth for the Federal Reserve. So tomorrow we'll be back. We'll have the Fed's preferred inflation indicator, which is the PCE. We need to see some indication that we're not seeing a resurgence here in inflation if we are going to make any adjustments to our forecast that the Fed's likely on hold for the remainder of this year. That's all we have. If you have any questions or comments. Please feel free to reach out to podcasts at verdence. com. Thank you.