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First-quarter GDP forecast to increase at a 2.4% rate

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Consumer spending likely to account for much of GDP growth

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Core PCE inflation seen rising at a faster 3.4% pace

By Lucia Mutikani

WASHINGTON, April 25 (Reuters) - U.S. economic growth

likely slowed to a still-solid pace in the first quarter while

inflation accelerated, reinforcing financial market expectations

that the Federal Reserve would delay cutting interest rates

until September.

The Commerce Department's snapshot of first-quarter gross

domestic product on Thursday is expected to show consumers still

doing the heavy lifting for the economy, thanks to a resilient

labor market. The economy has defied prophecies of doom since

late 2022 following the U.S. central bank's aggressive rate

hiking campaign to snuff out inflation.

The United States is outperforming other advanced economies.

Consumers locked in lower mortgage rates, while businesses

refinanced debt before the tightening cycle began, economists

say. Companies are also hoarding workers after experiencing

difficulties finding labor during and after the COVID-19

pandemic, and are enjoying higher profit gains because of strong

pricing power.

"They have been relatively insulated from the rate

increases," said Richard de Chazal, macro analyst at William

Blair. "In past economic cycles, at the first whiff of an

economic slowdown, companies in the U.S. used to fire workers

very quickly and then they knew that they could hire them back

very quickly once the cycle turned."

Gross domestic product likely increased at a 2.4% annualized

rate last quarter, according to a Reuters survey of economists.

Estimates ranged from a 1.0% pace to a 3.1% rate. The economy

grew at a 3.4% pace in the fourth quarter.

It is expanding at a pace above what Fed officials regard as

the non-inflationary growth rate of 1.8%. The International

Monetary Fund last week upgraded its forecast for 2024 U.S.

growth to 2.7% from the 2.1% projected in January, citing

stronger-than-expected employment and consumer spending.

Job gains in the first quarter averaged 276,000 per month

compared to the October-December quarter's average of 212,000.

Labor market resilience is likely to be underscored by the

Labor Department's weekly jobless claims report, which is

expected to show first-time applications for unemployment

benefits climbing 3,000 to a seasonally adjusted 215,000 in the

week ending April 20. Initial claims have bounced around in a

194,000-225,000 range this year.

Low layoffs are keeping wage growth elevated, sustaining

consumer spending, which accounts for more than two-thirds of

economic activity.

Though inflation probably surged, with the personal

consumption expenditures (PCE) price index excluding food and

energy forecast increasing at a 3.4% rate after rising at 2.0%

pace in the fourth quarter, economists were not worried about a

resurgence in price pressures.

RATE CUTS STILL EXPECTED

The so-called core PCE price index is one of the inflation

measures tracked by the Fed for its 2% target. The central bank

has kept its policy rate in the 5.25%-5.50% range since July. It

has raised the benchmark overnight interest rate by 525 basis

points since March of 2022.

James Knightley, chief international economist at ING, said

persistent inflation would require higher wages, which would

give consumers more purchasing power and allow companies to

raise prices..."but what we're seeing is labor demand and cost

indicators weakening quite considerably."

"There doesn't appear to be a threat of wage growth

accelerating and keeping inflation elevated for longer."

Economists believe consumer spending more or less maintained

the 3.3% growth pace seen in the fourth quarter, also supported

by higher stock market prices.

They, however, worry that lower-income households have

depleted their pandemic savings and are largely relying on debt

to fund purchases. Recent data and comments from bank executives

indicated that lower-income borrowers were increasingly

struggling to keep up with their loan payments.

The economy was also likely supported by the housing market,

with double-digit growth anticipated in residential investment

thanks to a severe shortage of previously owned homes for sale,

which is encouraging the construction and sale of new

single-family homes. Business spending on intellectual property

was probably a boost as companies invest in artificial

intelligence.

Though investment in nonresidential structures continued to

rise, the pace likely slowed sharply from the past year when

companies took advantage of policies by President Joe Biden's

administration to bring the production of semiconductor

manufacturing back to the United States by building factories.

Trade likely subtracted from GDP growth as some of the

increase in consumer spending was satiated by imports.

Business spending on equipment was probably another drag,

contracting for the third straight quarter. That together with

weakness in sentiment surveys have led some economists to

believe the economy is likely not as strong as portrayed by the

GDP and labor market data and to expect a slowdown in growth.

Others, however, cautioned against reading too much into the

divergence between the so-called hard data and the sentiment

surveys, arguing that the pandemic had made it difficult to get

a clear signal from the surveys. They also argued that

businesses were generally conservative by nature.

"Those (survey) gauges still have not normalized yet,

relative to the reality of the economy," said Brian Bethune, an

economics professor at Boston College. "Businesses are seeing

things pan out somewhat better than what they expected, which is

what matters for them."