US GDP Plunges in Q1, Raises Stagflation Fears

US GDP Plunges in Q1, Raises Stagflation Fears 

If the Biden administration wanted the Federal Reserve to consider lowering interest rates and implementing monetary easing before the election, they would need to see signs of significant economic decline in the US right about now. 

That's why it's not surprising that the Biden Bureau of Economic Analysis recently announced that in the first quarter, US GDP unexpectedly dropped to only 1.6%, a decrease of over 50% from the 3.4% reported in the previous quarter and well below the estimated 1.6%.

Interestingly, the GDP figure fell even lower than the most conservative forecast (from SMBC Nikko) of 1.7%, while the highest prediction (from Goldman Sachs) of 3.1% missed the mark by a significant margin, as is often the case.

However, the GDP decline is only part of the story. Simultaneously, the BEA reported that the GDP Deflator (price index) rose to 3.1%, surpassing the expected 3.0% and almost doubling the 1.6% recorded in Q4. 

Even more concerning, the core Personal Consumption Expenditures (PCE) for Q1 surged from 2.0% to 3.7%, exceeding estimates of 3.4%. This suggests that the US economy may be heading towards a stagflationary recession, skipping the soft-landing scenario entirely, unless the Federal Reserve intervenes. Yet, given the challenges of rising inflation and slowing growth, what actions the Fed can take remain uncertain.