US Economy Unexpectedly Slows to 1.1 Percent in First Quarter
The U.S. economy expanded by 1.1 percent in the first quarter, down from 2.6 percent in the fourth quarter, according to the Bureau of Economic Analysis (BEA). This also came in below economists’ expectations of 2 percent.
This was the slowest quarterly growth since the second quarter of 2022.
Growth in the real GDP was driven by higher consumer and government spending and exports. This was offset by declines in private inventory investment and residential fixed investment.
For market observers, the big surprise was the pop in inflation in the last quarter.
The GDP Price Index, a gauge of prices of goods and services produced in the United States, unexpectedly rose to 4 percent in the first three months of 2023. This was up from 3.9 percent in the previous quarter and higher than the market forecast of 3.7 percent.
In the first quarter, the personal consumption expenditure (PCE) price index surged to 4.2 percent, up from 3.7 percent. This was also much higher than the anticipation of 0.5 percent. The core PCE price index, which excludes the volatile food and energy sectors, advanced to 4.9 percent.
The GDP Sales Index, which measures the goods and services produced for sale in the national economy, climbed to 3.4 percent in the first quarter, topping market estimates of 2.3 percent. This was also up from the fourth quarter’s 1.1 percent increase.
Real consumer spending accelerated 3.7 percent quarter-over-quarter, up from 1 percent. Trading Economics had projected a boost of 0.7 percent.
Meanwhile, real disposable personal income (inflation-adjusted) jumped 8 percent in the January-to-March period, up from 5 percent in the fourth quarter. The personal savings rate in the three months ending in March was 4.8 percent, up from 4 percent in the previous quarter.
Before the BEA figures were released, the Federal Reserve Bank of Atlanta’s GDPNow real GDP estimate for the first quarter was 1.1 percent, down from as high as 3.5 percent in March.
Investors kept their pre-market gains intact as the leading benchmark indexes were up as much as 0.9 percent.
The U.S. Treasury market was green across the board, with the benchmark 10-year yield rising about 6 basis points to nearly 3.49 percent.
The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, gained close to 0.2 percent to above 101.65 following the latest GDP data.
What Does the Second Quarter Look Like?
Looking ahead to the second quarter, economists will be looking to see how much impact the banking turmoil will have on the broader economy. The April-to-June period should see more of the fallout from tightening lending conditions, experts say.
The Conference Board downgraded its second-quarter forecast from negative 0.9 percent to negative 1.8 percent due to the “reverberations associated with the March banking crisis.”
“While the worst of the crisis appears to be over, we expect credit conditions to remain tight and sentiment among consumers and businesses to suffer due to the shock,” wrote Erik Lundh, CB’s principal economist, in a report.
S&P Global anticipates 1 percent real GDP growth in the second quarter, although economists anticipate “a very shallow U.S. recession in its baseline forecast, in such an uncertain environment.”
The Wall Street Journal Economic Forecasting Survey of economists shows a contraction of at least negative 1 percent.
The “acute bank stress” has convinced Paul Ashworth, the chief North America economist at Capital Economics, that the U.S. economy will fall into recession this year.”
“Despite the strong start to the year evident in the coincident activity data, the growth rate of the leading economic index is deep in negative territory, which has proven to be an excellent recessionary signal, with few false positives over the past 50 years,” he stated in a research note.
In March, the Conference Board’s Leading Economic Index (LEI) tumbled by 1.2 percent to its lowest level since November 2020. The LEI, which assesses jobless claims, manufacturers’ new orders for consumer goods, and stock prices, declined 4.5 percent over the six-month period between September 2022 and March 2023.
“The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the U.S. economy over the coming months, leading to a recession starting in mid-2023,” wrote Justyna Zabinska-La Monica, the senior manager of Business Cycle Indicators at The Conference Board, in a report.
According to minutes from the Federal Reserve’s Federal Open Market Committee (FOMC) policy meeting last month, staff economists expect a “mild recession” later this year.
