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Key Takeaways
- Thursday’s GDP report presented a paradox of sorts: The economy is growing in all the right places (for instance, in the job market) but in all the wrong places too (prices).
- The report concerned some investors and economy watchers who fear the U.S. could be starting a period in which rapid growth slows while the cost of living keeps rising, known as stagflation.
- Economists said the details of the report show that the concern is not founded.
- It does, however, complicate the job of Federal Reserve officials, who are trying to rebalance economic growth and inflation as they decide whether to trim interest rates.
In the post-pandemic era, the U.S. economy has had a distinct upside and downside: a good job market and fast economic growth, at the cost of stubbornly high inflation.
But Thursday’s report on the Gross Domestic Product (GDP) raised the possibility of that rapid growth slowing down, while the cost of living keeps rising rapidly—a combination of stagnant economy and inflation known by the portmanteau “stagflation.”
Many economists downplayed concerns about possible stagflation. In recent months, the economy has increasingly seemed to be headed for a “soft landing” from the post-pandemic burst of inflation rather than an economic crash, and many experts think the economy is still on that trajectory, even if the road is getting bumpier.
There were some warning signals in Thursday’s data. The GDP grew at a 1.6% annual rate in the first quarter, well short of the 2.2% median forecast of economists, while inflation as measured by Personal Consumption Expenditures jumped to 3.4% from 1.8% in the previous quarter, exceeding expectations.
The ‘Disappointment’ Is In the Details
But digging into the details, some economists found the picture wasn’t quite as grim as it seemed on the surface.
“You’re going to be hearing a lot about stagflation for the rest of today. Ignore it.” Ian Sheperdson, chief economist at Pantheon Macroeconomics wrote on social media platform X.
For one thing, the slowdown in GDP growth was influenced by a rise in imports. Because of the way the GDP is calculated, imports pulled down GDP while still indicating people have plenty of money to spend to buy stuff from overseas.
In fact, consumer spending on services is accelerating even though households seem to be cutting back on big-ticket items, economists at Wells Fargo Securities said in a research note.
In other words, the GDP “disappoints for the right reasons,” Gregory Daco, chief economist at EY Parthenon, posted on X.
Furthermore, Daco pointed out that the hot inflation figures were heavily boosted by “financial services” costs, which are influenced by stock prices rather than broader inflation trends.
Federal Reserve Rate Hikes Are ‘Not Working’
Ever since March of 2022, the Federal Reserve has fought inflation by raising its benchmark interest rate, driving up borrowing costs to cool the economy and discourage spending, at the risk of causing a recession. Even with interest rates currently sitting at a 23-year high, the economy may be on track to continue its fast growth, for better or for worse.
“Higher rates are intended to cool consumer demand,” Tim Quinlan and Shannon Seery Grein, economists at Wells Fargo Securities, wrote in a commentary. “The trouble for the Fed is: it’s not working.”
The Fed’s preferred measure of inflation will be released Friday morning, providing another opportunity to assess the impact of high rates. Fed officials have said repeatedly they need more confidence that inflation is heading to the central bank’s 2% target before they will cut the benchmark interest rate.