4/28/23 – The US Consumer Saves 1st Quarter GDP

The first look at Q1 GDP offered something for everyone.  The headline number presented quarter-over-quarter growth of 1.1%, below the expected 1.9%.  The obvious takeaway is that economic activity is weakening as the U.S. slowly slips toward recessionary territory.  But we would argue that, while that may be true, activity in Q1 was not as bad as that first look.  The BLS measures GDP on a quarter-over-quarter basis, which makes no sense, as the final quarter of the year is always the most robust.  To adjust for that, the BLS seasonally adjusts the number to achieve a smoothing effect.  We prefer, instead, to compare the economic activity on a year-over-year basis.  From that perspective, Q1 GDP registered 1.6% over the GDP reported for Q1 2022 – Better than the reported Q/Q 1.1% headline.  However, Q1 2022 grew 3.7% over Q1 2021.  So yes, economic activity growth slowed, but from a torrid pace and despite the draconian pace of overnight rate hikes.  Digging a little further, residential investments (home sales) fell 19.0% from the level recorded in the first quarter of last year.  That drag was offset by a fairly strong pace of personal consumption, which came in at an annualized 3.7%.  The real fly in the ointment of the report was the personal consumption price index.  That inflation measure registered 4.9% for the quarter, the third highest rate of the last 25 years.

That combination of slowing economic growth and stubbornly high inflation has many market watchers expecting that the Federal Reserve will need to cut rates by the end of this year, as the labor market begins to deteriorate.  While this week’s initial claims for unemployment insurance ticked lower, the layoff announcements are becoming more frequent and that will ultimately take the unemployment rate higher.

Finally, perhaps the biggest surprise this week was the abysmal quarterly earnings report for First Republic Bank.  First Republic has suffered from the same issues that drove Silicon Valley and Signature Banks out of business.  The problems at First Republic seem insurmountable, and we wonder if the entity will last the weekend.

Looking to the week ahead, the main event will be the FOMC announcement on Wednesday.  The consensus is that the Fed will raise the overnight rate by another 25 basis points, but the wild card will be the press conference that follows.  We expect that Chairman Powell will do his best to maintain his hawkish tone, but wonder if he’ll acknowledge the widening signs that economic grow is slowing.  Also on our radar is the April employment report.  Payroll growth is expected to decelerate to 180,000 new jobs with the unemployment rate ticking up to 3.6%.