Volkswacht Bodensee - US revises first quarter growth down while inflation climbs

The figures sound a warning on pressures that American households are facing ahead of midterm elections, as steeper gasoline prices squeeze budgets and a boost from tax refunds fades.

Gross domestic product in the world's biggest economy rose at an annual rate of 1.6 percent in the first three months this year, the Commerce Department said.

This was down from an earlier estimate of 2.0 percent, with the pullback "primarily reflecting downward revisions to investment and consumer spending," the department added.

"New data showed services spending, particularly on medical services, slowed and business inventories fell by more than previously estimated," said economist Michael Pearce of Oxford Economics.

Downward revisions to consumer spending in the first quarter, alongside a slowdown in April, "point to a consumer coming under stress," he added.

Pearce was referring to another report that showed the US Federal Reserve's preferred inflation measure rising to its highest year-on-year rate since 2023.

The personal consumption expenditures (PCE) price index increased 3.8 percent from a year ago, the Commerce Department said, up from 3.5 percent in March.

US personal consumption expenditures rose by 0.5 percent in April, but disposable personal income fell by 0.1 percent.

"You can see how Americans are getting squeezed financially right now," said Heather Long, chief economist at Navy Federal Credit Union.

Pearce expects that higher energy prices are likely to keep GDP growth "moderate this year."

Energy costs have surged following US-Israeli strikes targeting Iran on February 28, engulfing the Middle East in conflict and triggering Tehran's retaliation that has virtually blocked the Strait of Hormuz.

The key waterway normally sees about a fifth of the world's oil and gas supplies pass through it, and is also essential for the global fertilizer trade.

Global costs have soared, with prices at American gasoline stations also spiking -- piling pressure on consumers ahead of elections at the end of the year.

Rising fuel prices saw US consumers spend $28.8 billion more on gasoline and related products in April over the same month a year ago, the data showed.

- Spending power eroded -

"Remember that 70 percent of the US economy is consumer spending," said ING chief international economist James Knightley in a note.

Higher gasoline prices are not just an inflation problem but will weigh on economic activity too, he warned.

EY-Parthenon chief economist Gregory Daco added: "Household budgets are coming under mounting pressure from rising inflation and a softer income backdrop, while slower wage and job growth continue to weigh on purchasing power."

"As a result, we expect spending momentum to cool," he said.

More broadly, analysts have warned of the country's reliance on an AI investment boom to fuel growth, alongside consumer fatigue as the energy shock from the war on Iran lingers.

Still, growth accelerated from a 0.5 percent rate in the fourth quarter of 2025.

The step up between the final months of 2025 and early 2026 was attributed to "upturns in government spending and exports and an acceleration in investment," while consumer spending decelerated.

Adding to the gloomy data was another government report showing that sales of new US homes pulled back in April, as higher costs weighed on consumers.

Sales came in at a seasonally-adjusted annual rate of 622,000, the Commerce Department said, 6.2 percent below March's rate of 663,000.

This was 11.3 percent lower than the pace seen a year ago, as the median sales price of new houses rose 8.0 percent from March and mortgage rates continue to climb.

As of the week of May 21, the popular 30-year fixed-rate mortgage averaged 6.5 percent, up from levels seen in the prior month.

P.Keller--VB