US GDP revised down to 1.6%, raising bets on Fed rate cuts

The US economy grew at a 1.6% annualized rate in the first three months of the year, the Bureau of Economic Analysis said Thursday, a downward revision from the 2% preliminary reading that points to a loss of momentum heading into the second quarter.

"The downward revision confirms that growth is moderating after a strong 2025, though not collapsing — which keeps the Fed in a wait-and-see mode," analysts at Monex Europe wrote in a note. The revision comes as the Conference Board's consumer confidence index printed at 93.1 in May, above the 92.0 consensus, though the Present Situation component slipped to 121.2, with respondents flagging the inflationary impact of the war.

The data lands ahead of Thursday's concurrent releases of weekly jobless claims and April core PCE, the Fed's preferred inflation gauge. The dollar index held near 99.1 after the release, while Brent crude traded near $95 a barrel as Middle East risks persisted.

Growth Slowdown in Context

The 1.6% annualized pace marks a deceleration from the 3.1% rate recorded in the fourth quarter of 2025, according to BEA data. The downward revision from the initial 2% estimate was driven by softer consumer spending and business investment than initially reported, though the BEA did not immediately provide a full component breakdown.

The revision brings the first-quarter print below most estimates of the economy's potential growth rate, a threshold that typically signals the economy is operating below capacity. The last time GDP growth was revised lower by a similar magnitude was in the third quarter of 2024, when the initial 3% reading was cut to 2.8%.

Global Central Bank Divergence

The US slowdown contrasts with diverging policy paths across major central banks. The European Central Bank is expected to hike rates in June, with ECB chief economist Philip Lane having pre-positioned markets for staff projections that will revise inflation higher and growth lower to reflect the war's macro fallout, according to Monex.

The Bank of England held Bank Rate at 3.75% earlier in May on a hawkish vote split, with Governor Andrew Bailey's scheduled speech Friday the focal event for sterling this week. The Bank of Canada, by contrast, has held its policy rate at 2.25% and left both cuts and hikes on the table. Canada's Q1 GDP is due Friday with consensus around 1.5% annualized, a sharp rebound from a 0.6% contraction in Q4.

Cross-Asset Reaction

Treasury yields edged lower after the release as traders added to rate-cut bets. The S&P 500 traded near 7,520, little changed on the session, as the data reinforced expectations for easier monetary policy without triggering recession fears. The dollar gave back some of Tuesday's gains after fresh US strikes on Iranian targets pushed Brent crude back toward $95 a barrel.

In currency markets, the euro held near $1.08 against the dollar, with EURUSD supported by the asymmetric rate outlook between a hike-leaning ECB and an on-hold Fed. Sterling traded near $1.34, with cable vulnerable to further escalation in the Middle East given the UK's exposure to geopolitical risk premia.

The downward revision raises the stakes for the remainder of the week's data, with April core PCE due later Thursday. A softer reading on inflation combined with the weaker GDP print would strengthen the case for rate cuts, while a hot PCE number would complicate the Fed's messaging ahead of its June 17-18 meeting.

This article is for informational purposes only and does not constitute investment advice.