GDP Growth Slows In Q1, Adding Fuel To The Recession Fire

Key takeaways

• US GDP only grew by 1.1% in Q1, missing expectations of 1.9% economic growth
• Treasury yields rose and stock markets made gains at the news
• Other economic indicators suggest a recession is on the way, but it could be mild

New government data revealed US GDP didn’t grow as much as expected in the first quarter of 2023, adding to existing fears about a recession being on the way. It adds to the mixed outlook from the rest of the economic data on housing, manufacturing and money supply this week.

Despite fears of a pending recession, the markets were unphased and have continued their rally. The GDP data also suggests an interest rate hike is all but confirmed, though other factors could influence the decision. We’ve got the lowdown on what the figures mean, how Wall Street reacted and whether a recession is on the coming or not.

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What did the GDP report look like?

The Bureau of Economic Analysis said gross domestic product grew by 1.1% annually, as opposed to the 1.9% predicted. The gain was due to increased consumer spending, exports and federal government spending, among other factors.

Inflation is still a nagging economic issue – and most importantly, not great news for American households’ spending power. Prices are still accelerating, with the price index for gross domestic purchases rising 3.8% as opposed to 3.6% from the previous quarter. Taking out volatile food and energy prices, the personal consumption expenditures price index increased by 4.9%, up from last quarter’s 4.4%.

While the Fed will be somewhat pleased to see GDP falling as a sign its monetary tightening policy is working, it’s clear the Fed is in a marathon rather than a sprint to bring inflation down. This latest data has all but cemented its position to increase interest rates again at its next meeting in May.

The CME FedWatch tool now says there’s an 88.6% chance the Fed will look to increase rates by another quarter-point, bringing interest rates into the 5% – 5.25% range.

What was the market reaction?

Higher growth and higher inflation aren’t good news for bonds, which reacted accordingly. The 10-year Treasury yield rose to 3.5% on Thursday, an increase from its 3.429% position the day before. The two-year Treasury yield hit 4.04%, another increase from its 3.924% position on Wednesday.

As for the stock market, it gained at the news GDP had risen even if it missed targets. The S&P 500 is up 1.96%, the Dow Jones hit a 1.57% gain and the Nasdaq Composite is up 2.43%, already boosted by some better-than-expected Big Tech Q1 earnings.

The other economic data

It’s been a busy week with a flurry of new economic data sets to give investors more of an idea of what the Fed might be thinking about interest rates.

The latest housing market data came in hotter than expected, with a 0.5% price rise for homes in the US, according to the US Federal Housing Finance Agency. It’s a traditional house-selling period but national inventory is still low, driving up sellers’ asking prices.

The Philadelphia Fed’s manufacturing index painted a somber picture, dropping by -31.3 instead of the predicted -19.2, the lowest figure since May 2020. It caused Treasury yields to dip, with the US dollar slipping to 102.00 at the time.

Unemployment has steadily risen, though the newest figures have just broken the trend. For the week ending April 22, the Department of Labor reported a 16,000 drop to hit 230,000 against a predicted 250,000. Still, the claims are trending upwards on a monthly basis.

Inflation hit 5% in March, down from 6% in February and way off the eye-watering 9% mark back in June 2022. But the M2 data, which measures the money supply, recorded its biggest drop ever with a -4.05% growth retraction from the previous year.

The only data report we’re waiting on now, which might offer a glimmer of hope, is the personal consumption expenditures report due later on Friday.

Are we heading for a recession?

The Q1 GDP data can be a bit behind the times, as we’re already starting to see a slowdown in consumer spending power since last month. But it still missed its target by some margin, leading some traders to fear the recession may be closer than previously thought.

The data is definitely trending in a certain direction: a recession is coming. But investors and analysts are wondering whether it will be a mild or heavy one. Banks have already tightened lending criteria in the wake of the March banking crisis, which felled three banks, and this could help the Fed’s inflation fight.

It’s a fine line that the Fed has to tread: balancing inflation with unnecessary pressure on the economy with interest rates. The Q1 GDP being weaker than expected suggests the latter might be happening. At least a 5% interest rate target gives the Fed some leeway to cut rates should the economy be in dire straits.

Let’s just say we’re glad we’re not the ones faced with those tough decisions.

The bottom line

The GDP results weren’t great, all but guaranteeing a quarter-point interest rate hike from the Fed. As recession fears grow, the stock market is still chugging along nicely as the 2023 rally continues – though for how long is yet to be determined.

From an investment perspective, the preparations can start now. Adopting a recession-proof portfolio strategy, taking a long-term view of the stock market and of course, using AI investing, will all help to shore up your portfolio against any incoming headwinds.

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