Analysis of First-Quarter GDP Report and Stagflation Fears on Wall Street

The latest GDP report has sent shockwaves through Wall Street, with fears of stagflation creeping into the conversation. The headline number of 1.6% growth missed estimates by a wide margin, but economists at Wells Fargo are cautioning against jumping to conclusions.

According to Wells Fargo economists Tim Quinlan and Shannon Seery Grein, the deceleration in GDP growth was largely due to volatile factors like a wider trade deficit and slower inventory restocking. However, they point out that consumer demand remains robust, with a surge in spending on services offsetting a decline in spending on durable goods.

In fact, services spending saw a blistering 4.0% annualized growth rate in the first quarter, the fastest surge since 2021. This strong demand in services has led to a 5.1% price increase in the sector, outpacing the broader core rate of 3.7%.

Despite slower growth in real disposable incomes, Americans are continuing to spend at a faster pace, driving the personal savings rate to its lowest level since the end of 2022. While trade deficit and inventory data may have clouded the picture, a gauge of underlying domestic demand excluding these factors rose by 3.1%.

The Wells Fargo economists are urging caution against a gloomy outlook, emphasizing the strength and stability of the economy. They argue that the current growth in consumer spending signals healthy growth, despite concerns about inflation and weak growth.

However, other experts are less optimistic, with EY chief economist Gregory Daco warning of further downside risk if inflation remains stubborn. David Russell, global head of market strategy at TradeStation, also sees stagflation as a growing threat, questioning whether the trend towards lower prices will continue.

As the debate over the state of the economy continues, it is clear that the latest GDP report has sparked a range of reactions and concerns on Wall Street. Subscribe to the CFO Daily newsletter to stay informed on the latest trends and developments in corporate finance.