Two key pieces of economic information got here out on Thursday, and neither proved to be superb for the stock markets.

First, the U.S. Bureau of Economic Evaluation (BEA) released the first-quarter gross domestic product (GDP) on Thursday, which showed that economic growth slowed greater than expected. The GDP got here in at 1.6%, which was lower than the consensus estimate of two.4% for Q1 by economists. It was also the bottom growth rate for the reason that second quarter of 2022, when the GDP contracted.

While the official Personal Consumption Expenditures (PCE) results for March won’t be released until Friday morning, there have been another clues within the GDP report that suggested the Federal Reserve’s key inflation gauge could have ticked up in March.

Because of this, Thursday was not a great day for the markets, as the most important indexes were all within the red, led by the Dow Jones Industrial Average. As of 1 p.m. Eastern, the Dow was off by 470 points, declining 1.2%.

Slowest GDP growth since 2022

To this point, the Federal Reserve has been capable of navigate the economy toward its intended soft landing, meaning the central bank may have the opportunity to get inflation down without sending the economy into recession. Nevertheless, the first-quarter numbers reveal that while the economy has cooled, inflation could possibly be heading back up.

First, let’s have a look at the Q1 GDP. At 1.6% growth, it’s expanding more slowly than it did in Q4 when the GDP was at 3.4%.

The drop in GDP growth in comparison with Q4 is due primarily to slowing consumer spending, exports, and state and native government spending. The downturn in federal government spending hasn’t helped either.

These moves were partially offset by increases in residential fixed investment, which reflected a rise in home sales and recent housing construction. Imports also accelerated within the quarter.

While a slowing economy is a priority, the larger issue appears to be the inflation rate. Earlier this month, the Consumer Price Index (CPI) reading for March showed that inflation had increased 3.5% over the past 12 months — up from 3.2% in February.

The March reading for the Fed’s preferred inflation gauge, the PCE Index, is scheduled for release on April 26. Nevertheless, in its GDP report, the BEA posted first-quarter PCE numbers, which lends some insight into what we could see in March.

Could the March PCE Index tick higher?

The PCE for Q1, which incorporates January, February and March, increased 3.4%, in comparison with 1.8% within the fourth quarter of 2023. Excluding the more volatile food and energy prices, the PCE index increased 3.7% in the primary quarter, in comparison with a rise of two% in Q4.

The PCE Index readings from January and February were 2.4% and a pair of.5%, respectively. Thus, a first-quarter reading of three.4% suggests that the March number ought to be considerably higher — unless the January and February numbers were adjusted up. We’ll discover obviously on Friday, but on Thursday, the market took this as a foul sign.

In accordance with Reuters, Olu Sonola, head of U.S. economic research at Fitch Rankings, noted that the mixture of a slowing economy and rising inflation is a recipe for the Fed to potentially wait longer than expected to lower rates.

“The recent inflation print is the true story on this report. If growth continues to slowly decelerate, but inflation strongly takes off again within the flawed direction, the expectation of a Fed rate of interest cut in 2024 is beginning to look increasingly more out of reach,” Sonola told Reuters.

Investors will definitely be watching out for Friday’s PCE report for more insight into what the Fed might do. It had been widely anticipated that the central bank would enact three rate cuts in 2024, with the primary potentially coming in June or July. Nevertheless, if inflation continues to trend upward, many economists estimate that the primary cut won’t come until September.