- The market consensus expects the U.S. GDP annual growth rate for the first quarter to rebound to 2.3%, driven by a sharp rebound in public spending following the end of the federal government shutdown, which is expected to contribute at least 1 percentage point to total growth.
- Consumer spending, which accounts for more than two-thirds of the U.S. economy, continues to weaken. This is due to geopolitical conflicts pushing gasoline prices above $4 per gallon and a rebound in core inflation. The Personal Consumption Expenditures (PCE) Price Index growth rate for the first quarter is expected to rise to 3.8%.
- The Federal Reserve (Fed) announced that it would maintain the benchmark overnight rate in the range of 3.50%-3.75%. Many institutions foresee that this restrictive rate level will likely continue until the end of 2026 or even into 2027 due to the interplay of sticky inflation and marginal slowdowns in the labor market.
Short-term Boost from Government Spending and Economic Data
The macroeconomic indicators for the first quarter of the U.S. show a structural rebound. According to a broad survey by Reuters of economists, preliminary estimates to be released by the U.S. Department of Commerce are expected to show a GDP annual growth rate of 2.3% for the first quarter, with forecasts ranging from a contraction of 0.2% to a growth of 3.9%. This growth represents a significant improvement over the 0.5% weak performance of the fourth quarter last year. However, a breakdown of core GDP components reveals that this rebound is mainly due to base effects and cyclical fluctuations in fiscal spending. Between October and December last year, the partial federal government shutdown led to a sharp contraction in government spending, dragging GDP growth down by 1.16 percentage points, marking the largest single-quarter decline since 1994. With the resolution of the shutdown turmoil, the concentrated release of government public spending in the first quarter filled the previous gap, becoming a key pillar supporting the nominal growth data of the period.
Consumer Balance Sheet and Decline in Consumption Momentum
Beneath the facade of restored overall growth data, the consumer sector, a traditional engine of the U.S. economy, is facing severe balance sheet constraints. The consumer spending growth rate of 1.9% in the fourth quarter is expected to decline further in the first quarter. The main constraints are the secondary rebound of inflation and the overconsumption of household savings. Forward-looking data suggests that the PCE growth rate for the first quarter is expected to leap from the previous 2.9% to 3.8%, well above the Fed's long-term inflation target of 2%. Boston College economics professor Brian Bethune pointed out that with real wage growth stalled, consumers have primarily relied on depleting excess savings to maintain consumption levels, leading the national personal savings rate to fall to a low of 4.0% in February. Coupled with recent geopolitical tensions causing the national average gasoline price to soar above $4 per gallon, household purchasing power for non-essential goods is being substantially squeezed, making this consumption model relying on overdrawing savings unsustainable.
Corporate Capital Expenditure Divergence and AI Equipment Boom
While the consumer engine is stalling, fixed asset investment on the corporate side shows significant structural divergence. Orders for core capital goods excluding aircraft rose by 3.3% month-over-month in March, indicating strong corporate capital expenditure intentions in specific areas. This unexpectedly high investment demand is mainly driven by the artificial intelligence (AI) wave and the construction of underlying data center infrastructure, with related hardware equipment procurement showing strong double-digit growth expectations. However, this intense capital expenditure has not fully extended to other sectors of the real economy. Beyond the AI investment boom, traditional non-residential building and plant investment intentions remain sluggish, constrained by persistently high financing costs. Meanwhile, the massive imports driven by AI hardware demand have led to a sharp expansion of the goods trade deficit. The surge in imports has not fully translated into immediate consumption, leading instead to inventory accumulation in company warehouses, partially offsetting the contribution of fixed asset investment to GDP on financial statements.
Labor Market Reevaluation and Monetary Policy Path
In its latest policy meeting, the Fed chose to keep the benchmark interest rate steady at a restrictive range of 3.50%-3.75%. This decision reflects a comprehensive consideration of the current labor market conditions and the risk of inflation rebound. In the first quarter, non-farm employment data shows the U.S. added an average of just 68,000 jobs per month, which, although an improvement over last year's 20,000, indicates a cooling trend compared to two years ago. Some market perspectives attribute the constrained labor supply to lagged effects of previous trade and immigration policies. Gus Faucher, chief economist at PNC Financial Services Group, believes that the moderately stable labor market without a trend of deterioration provides the Fed with resilience in monetary policy. Facing energy price fluctuations, geopolitical premiums, and stubborn 3.8% PCE inflation, policymakers see no immediate urgency to cut interest rates to stimulate employment. Conversely, if the adverse effects of geopolitical conflicts fully transmit to the real economy in the second quarter, the Fed may extend the current rate plateau in substance to the second half of 2026 or even 2027, using time to confirm the defeat of inflation.
