GDP Growth Bust Is Final Nail in the Coffin for June Rate Hike

The first look at Q1 U.S. GDP growth fell short of forecasters’ already soft projections. Consumer spending grew at less than half the pace of the prior quarter, while exports contracted. As disappointing as growth was, it would have been in negative territory were it not for a significant and undesired inventory build. This report probably puts the final nail in the coffin of expectations for a June rate hike. To be sure, analysts will question whether the economy can regain footing sufficiently to keep September in play. This afternoon’s FOMC statement will be toned down accordingly.

• Real GDP growth was just 0.2 percent in Q1 compared to consensus expectations of 1.0 percent, which had steadily drifted lower since the start of the year. Due to solid expansion in the middle of 2014, the year-on-year growth rate accelerated to 3.0 percent from 2.4 percent, but policymakers will be focused on the more recent deceleration. Growth was a trend-like 2.2 percent in Q4 and barely positive in Q1. Today’s result bears an odd resemblance to last year at this time, when Q1 growth significantly disappointed and ultimately was revised into negative territory.