The economy is slowing down, but the outlook is not as bleak as the GDP headline figure suggests. Instead, the report tells a nuanced story of where things stand.

Why it matters: The first quarter's 1.6% annualized growth rate confirms that the economy is not reaccelerating to start 2024.

• Meanwhile, there are warning signs that inflation rebounded, which makes the prospect of interest rate cuts look all the more distant.

The big picture: GDP is an imperfect measure, with calculation quirks that can pull down (or boost) the number in ways that don't reflect substantial shifts in the economy.

• That is the case with today's report, which shows drags from volatile categories instead of a turning point in the economy.
• The biggest economic drag last quarter was the surge in imports. That may suggest strong domestic demand for goods, but imports are a subtraction in the calculation of GDP. That category alone subtracted 0.96 percentage points from the headline figure.
• Companies also shed inventories at a rapid rate last quarter, with another 0.35 percentage point drag from that category. But that category is more economic noise than signal: It can be volatile quarter to quarter.

What they're saying: "The underlying data in the GDP report reflects the rock-solid economic activity that has been on display inside other high frequency data," RSM chief economist Joe Brusuelas wrote this morning.

• "Still, even after adjusting for the volatile data, the U.S. economy is slowing, which carries important policy implications," Brusuelas added.

By the numbers: Indicators of the underlying trend in U.S. economic activity were steady in the new report, despite the downshift in overall GDP growth.

• Final domestic private sector sales came in at a 3.1% annualized rate in the January to March period, slowing only slightly from 3.3% in the previous period.
• That is the result of solid, albeit somewhat cooler, consumer spending that increased at a 2.5% annualized rate last quarter — down from 3.3% in the fourth quarter of 2023.

The intrigue: The housing slump driven by much higher interest rates that put builders on the sidelines looks finished. Residential investment soared at a 14% annual rate last quarter, a big jump from the 2.8% in the prior quarter.

• Of course, it's unclear how long that will last, given the recent rebound in mortgage rates that are now above 7%.

The most troubling part of the report might be what it indicates about inflation so far in 2024.

Driving the news: The personal consumption expenditures index, the Fed's preferred inflation gauge, rose at a 3.4% annual rate last quarter — much higher than the 1.8% in the fourth quarter of last year and the hottest print in a year.

• The price index for gross domestic purchases — prices paid not just by U.S. consumers but also businesses and government agencies — rose at a 3.1% annual rate, up from 1.6% in the final months of 2023.
• That led investors to further push back their expectations of when the Federal Reserve might cut interest rates and a new spike in bond yields. Two-year U.S. treasury yields rose 0.05 percentage points this morning to a hair below 5% (4.995% as of 10:30am ET, to be precise).

Between the lines: The not-so-great news on inflation trends in the first quarter have been piling up, so the GDP numbers aren't new, exactly (though they incorporate March PCE data that won't be formally released until tomorrow morning).

• But they do affirm that the apparent progress toward the Fed's 2% inflation target didn't merely stall in the first quarter, but reversed.

The bottom line: "The hot inflation print is the real story in this report," writes Olu Sonola, Fitch's head of US economic research, in a note.

• "If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction," the possibility of a rate cut this year "is starting to look increasingly more out of reach."