The US GDP and PCE growth rates were both drastically reduced in the first quarter, making more room for the Federal Reserve to cut interest rates during the year.

On May 30, revised data released by the US Department of Commerce showed that the US real GDP annualized quarterly growth rate for the first quarter was 1.3%, down 0.3 percentage points from the initial value of 1.6%, and a sharp drop from 3.4% in the fourth quarter of last year.

The decline in economic growth is mainly due to lower consumer spending than expected. As the main growth engine of the US economy, the month-on-month growth rate of personal consumption expenditure (PCE) in the first quarter was drastically reduced.

Specifically, PCE's annualized quarterly increase in the first quarter was 2%, down 0.5 percentage points from the initial value of 2.5%, and lower than the expected value of 2.2%.

In terms of inflation, the Federal Reserve's most popular indicator — the PCE price index — grew 3.3% quarter-on-quarter in the first quarter, slightly lower than the initial forecast. The core PCE price index, which excludes food and energy, rose 3.6%, down 0.1 percentage points from the initial value of 3.7%, and a sharp increase from 2% in the fourth quarter of last year.

Meanwhile, the GDP purchase price index rose 3.0% in the first quarter, down 0.1 percentage points from previous estimates.

After the data was released, the three major US stock index futures rose slightly; the decline in NASDAQ futures narrowed to 0.11%, and S&P 500 futures fell 0.24%; US Treasury bonds rose slightly, 30-year Treasury yields fell by more than 3 bps, and 10-year Treasury yields fell by about 5 bps.

Under high interest rates, the US economy may continue to decline

Compared with the fourth quarter of last year, real GDP growth slowed in the first quarter, mainly because commodity (especially automobile) spending weakened sharply and consumer spending data was revised downgraded; compared with preliminary estimates, exports and government spending slowed. However, residential investment and imports have rebounded.

GDP is likely to rebound in the second quarter. The latest forecast indicates that the economic growth rate in the second quarter may reach 3% or higher, similar to the situation in the last two quarters of 2023.

However, analysts believe that even if GDP rebounds in the second quarter, the US economy is unlikely to show strong momentum in the second half of the year.

Consumers are forced to use savings to maintain current spending levels, and continued inflation has weakened their purchasing power; the upcoming presidential election has also led some companies to wait and see about spending and investing.

High borrowing costs have been holding back economic growth. It is generally expected that the Federal Reserve will keep the key short-term interest rate at a high level close to 23 years until inflation slows further.

On Tuesday, the Federal Reserve hawks poured water on expectations of interest rate cuts. Minneapolis Federal Reserve Chairman Kashkari, who has the right to vote at the 2026 FOMC meeting of the Federal Reserve Monetary Policy Committee, said that the Fed's policy position is restrictive, but the Fed's policymakers have not completely ruled out the possibility of further rate hikes.

Editor/Somer