Real GDP expanded by 1.1% quarter-on-quarter (q/q, annualized) in the first quarter of 2023 – a marked deceleration from last quarter’s 2.6% – and well below the consensus forecast of 1.9%.
Consumer spending grew by a robust 3.7% – a meaningful acceleration from Q4’s gain of 1.0%. Spending on goods rose 6.5%, largely the result of a sharp rebound in durables (+16.9%), while non-durables edged higher by just 0.9%. Service spending was up by 2.3%.
Non-residential business investment expanded by a modest 0.7%, as a pullback in equipment spending (-7.3%) was more than offset by a robust gain in structures (+11.2%) and more modest growth in intellectual property products (+3.8%).
Residential investment declined for an eighth consecutive quarter – falling by 4.2%. That said, declines moderated in Q1 as home construction appeared to stabilize while home sales turned modestly higher.
Both exports (+4.8%) and imports (+2.9%) were higher last quarter, though a larger gain in the former meant that net trade made a small (+0.1 percentage point) contribution to headline growth.
Government spending rose 4.7%, thanks to gains at both the federal (+7.8%) and state & local (+2.9%) levels.
After making an outsized contribution to growth last quarter, inventory investment subtracted 2.3 percentage points from Q1 growth.
Core PCE – the Fed’s preferred inflation metric – rose to 4.9% q/q (annualized) in Q1, slightly stronger than the consensus forecast of 4.7%.
Key Implications
First quarter GDP came in well below the consensus forecast, largely owing to an outsized decline in inventory accumulation. Putting that aside, final domestic demand rose by a robust 3.2% – a meaningful acceleration from last quarter’s 0.7% gain.
Much of the strength on the domestic front was the result of a very strong reading on consumer spending. While warmer weather may have had some influence – particularly for January where there was an outsized gain in spending activity – a sturdy labor market alongside some easing in inflationary pressures are helping to support real household incomes and sustain a robust pace of consumer spending.
We have already started to see some evidence of cooling in the labor market, while other higher frequency data points indicate a further softening in economic activity heading into the second quarter. We expect these pressures to intensify over the coming months as the cumulative impact of higher interest rates and some tightening in bank lending standards exert a more meaningful drag on domestic demand, pushing growth to a near stall speed as early as Q2.
