The U.Seconomy is gearing up for an important announcement this Thursday, the 25th, as the Commerce Department is set to release the preliminary Gross Domestic Product (GDP) data for the first quarter of the yearWall Street has been buzzing lately, with forecasts suggesting that the U.SGDP will experience a robust growth of 2.5% in the last quarter.

Consumer spending remains the cornerstone

Recent data published last month revealed that the U.Seconomy grew at a revised annual rate of 3.4% in the fourth quarter of 2023, buoyed by strong consumer spending that sustained the vibrancy of business activities towards the end of last yearConsumer expenditure, which constitutes approximately 70% of the American economy, is anticipated to continue as a dominant driving forceIn the previous quarter, consumer spending accounted for an impressive 2.2 percentage points of GDP growth

Moreover, in March, retail sales in the U.Ssaw a month-on-month increase of 0.7%, with core retail sales—which strip out sectors such as automobiles, gasoline, building materials, and food services—increasing by 1.1%. This surge marked the highest growth since January 2023. Coupled with a revised retail sales growth of 0.9% in February, Wells Fargo is projecting that inflation-adjusted personal consumption will rise at a 3.0% annualized pace in Q1, slightly lower than the 3.3% seen in the previous quarter.

The resilience of the job market has allowed consumers to withstand short-term price pressuresNon-farm payroll reports indicate that an average of 276,000 jobs were added per month in the first quarter, up from 212,000 in the final quarter of last year, while wage growth remained robust at over 4% year-on-yearNotably, amidst rising prices impacting low-income consumers, these individuals have notably benefited from strong labor demand

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According to a recent report, "since the onset of the pandemic, the cumulative wage growth for low-income workers has been the most significant."

Encouragingly, the manufacturing sector, which constitutes 10% of the U.Seconomy, is showing signs of recoveryFollowing an upward adjustment in February’s output, March industrial production grew by 0.4%. This marks the first occurrence of two consecutive months of positive growth since the beginning of 2023, with manufacturing output—responsible for the majority of industrial output—rising by 0.5% in MarchThe Institute for Supply Management (ISM) reported that the manufacturing business activity index climbed from 47.8 in the prior month to 50.3, crossing the threshold into expansion territory for the first time in nearly two yearsA significant rebound in the new orders index underscores the robust momentum in consumer demand.

Moreover, despite a slight uptick in the trade surplus during the first quarter, government expenditure, business investment, and inventory valuations are expected to continue providing support for economic expansion.

The GDPNow model from the Atlanta Federal Reserve predicts an increase of 2.7%. It forecasts that real personal consumption expenditures and real private domestic investment are expected to grow by approximately 3.4% and 3.7% respectively during the first quarter.

In contrast, Goldman Sachs has adjusted its estimate for the annualized growth rate of GDP in the first quarter from 2.5% to 3.1%. Economist Spencer Hill discussed the key factors behind this optimistic outlook, attributing it mainly to the drop in mortgage rates that has stimulated residential investment, with an impressive annualized quarterly increase of 13%. This trend has consequently spurred both sales and the construction industry

Additionally, a robust recovery in automobile production and a rebound in manufacturing are anticipated to increase capital expenditures for equipment and structures.

Patience from the Federal Reserve

As evidence mounts with a series of positive economic data, it appears that the Federal Reserve is moving away from its earlier stance of advocating for three rate cutsAn unexpectedly strong GDP outcome for the first quarter might redirect the Fed's focus toward controlling inflation.

Boris Schlossberg, a macro strategist at BK Asset Management, expressed in an interview that the momentum among consumers shows no signs of abating, and significant risks of a sharp slowdown are virtually nonexistent"Looking beyond the first quarter, growth rates in the next three quarters are also expected to hover around 2.5%," he statedThis growth, he argued, will be bolstered by an effective supply of labor due to immigration, strong growth in real personal incomes, and a moderate improvement in financial conditions.

Federal funds futures indicate that investors are now anticipating the first rate cut to be delayed until the latter half of the year, with expectations of only two reductions at most

Significant financial institutions, including Deutsche Bank, JPMorgan, and Pimco, have revised their initially optimistic policy expectations accordingly.

Bob Schwartz, a senior economist at the Oxford Economics Institute, previously conveyed to reporters that while the Fed leans toward lowering rates this year, the strength of the labor market and the recent uptick in inflation provide it with the patience to waitShould the Fed choose not to cut rates by June, the opportunity for doing so could close until September, especially given the scant data available between the June and July meetings that could influence the Fed's economic assessments.

Stephen Stanley, Chief Economist at Santander US Bank, remarked in a report that the Federal Reserve does not prioritize the timing of rate cuts as long as inflation can reach the 2% targetHowever, the reality remains that if service prices do not cool down, achieving the 2% goal will prove challenging