US Advance GDP data: the good, the bad, and the ugly

Yesterday, early in the North American trading session, the Bureau of Economic Analysis released the Advance GDP data for Q1 2023. Estimates were that the economy would have grown by 2%  in the year’s first quarter. Unfortunately, the reality differed – the US economy only grew by 1%.

The Advance GDP data is the most relevant one out of the three reports calculated. The reason is that it is released the earliest and thus has a bigger impact on financial markets.

Indeed, the markets moved. The US dollar, for instance, declined on the report, as reflected by the USD/JPY exchange rate that gained one-hundred pips one hour after the release.

But what to make of this report? Is it that bad that it missed the estimate?

As usual, the details matter.

The good

The good part is that the economy is still growing, albeit slower. Nevertheless, growth is growth, so those looking for an economic recession must wait for at least two more quarters (i.e., the economy is in recession if the economic activity contracts for at least two consecutive quarters).

Another positive is that final sales grew by 3.4% on the quarter, with contributions from consumer spending, residential, and business investment.

The bad

The bad part starts with the chart above. It shows that the last quarter was the third consecutive one during which economic activity slowed down.

Given that the Fed needs a slower economy in its fight against inflation, it is unlikely that the trend will change anytime soon.

The ugly

The ugly part comes from, once again, inflation. The Advance GDP Price Index q/q showed that the prices of goods and services rose by 4% over the quarter, on expectations of 3.7%.

Also called the GDP Deflator, the index shows that inflation is not going anywhere. Hence, the Fed will hike some more, with another 25bp rate hike in the cards for next week.

Because rate hikes put pressure on economic activity, the economy looks on track to slow down even more.