Weekly Economic Trends and Indicators
The Headline:
Gross domestic product (GDP) increased at a 1.1% annual rate after adjusting for inflation during the first quarter of 2023, according to the Bureau of Economic Analysis. As expected, this figure provides evidence that the economy is slowing down as a result of the series of aggressive interest rate increases by the Federal Reserve.
The Details:
One of the more interesting aspects of the GDP report is the contribution of each of the components of GDP to overall growth. The table below shows that breakdown for the most recently ended quarter. For the most part, these numbers continue the trends of the last couple of quarters. Personal consumption’s contribution to GDP increased slightly to its highest level since 2021. Imports increased (which decreases GDP) also due to the strength in consumer spending. Residential investment has been a drag on GDP since 2021 Q2 due to the slowing housing market.
The Context:
There is, however, a negative number in this chart that could actually be a positive sign for the economy, and that is the change in inventories. The first quarter saw a significant drawdown of inventories as firms anticipate lower demand later in the year. Because the ongoing slowdown of the economy has been predicted for over a year, firms are taking it seriously enough to decrease production in advance of any potential recession. The continued strength of the consumer combined with lower production leads to lower inventories. This could soften the effects of a recession because some of the production cuts have already occurred. We could end up with just a growth slowdown, or recession that is less severe than originally feared.
The Fed meets on May 2nd and 3rd for another interest rate decision. The strength in consumer spending will likely cause the Fed to raise the fed funds rate at least one more time before pausing. Thus, it may be several months before businesses can build back inventories. The Fed remains focused on inflation and will allow growth to slow in order to meet their objective.
Next week: The Federal Reserve’s interest rate decision and the April employment report