Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
Economic news and commentary for April 27, 2023
US GDP
What recession? The US economy grows for the third straight quarter after the technical recession experienced in the first two quarters of 2022. US GDP grew 1.1% QoQ SAAR in Q1 2023 which is slower than the 2.6% in Q4 2022 but still a strong reading considering the interest rate situation. Personal consumption was strong, growing 3.7% QoQ SAAR which surpasses consumption growth in each 2022 quarter. The surge in durable goods new orders seen through the months of Q1 translated to a strong durable goods spending component which grew at a rate of 16.9%. This is the first quarter of growth for durables since Q1 2022 and the first quarter for general goods spending growth since Q4 2021. Services spending also expanded to start the year, up 2.3% QoQ SAAR, stronger than Q4 2022 services consumption growth of 1.6% QoQ SAAR. Consumers continue to surprise us. Despite interest rates ballooning over the last year, spending is as strong as in normal times. It seems like there was a slight boost in activity thanks to some warmer weather in the latter part of the winter, and the lingering of excess savings is apparently still strong enough to keep people buying things. Overall, consumption added 2.48 ppts to headline GDP growth, the strongest contribution since GDP bounced back after the pandemic in Q2 2021.
Offsetting the growth in consumption was a dismal investment number. Gross private domestic investment fell -12.5% QoQ SAAR. The number looks bad at first glance but fixed investment only fell -0.4% QoQ SAAR in the quarter. This includes further downsizing in firms’ investment in residential structures (residential investment -4.2% QoQ SAAR) that was mostly offset by nonresidential investment, up 0.7% QoQ SAAR, which benefitted from strong nonresidential structure investment, up 11.2% QoQ SAAR. The nonresidential strength likely comes from a rebound from the weak numbers a year and a half ago when supply in the sector was really low. The main reason why gross domestic investment fell so sharply was a decline in private inventories which was largely expected after the inventory growth in Q4 2022. Private inventories contributed -2.26 ppts to headline GDP which almost entirely accounts for the -2.34 ppts contribution made by private investment as a whole.
Outside of these two categories, which had large, offsetting contributions, we find that net exports made a small contribution of 0.11 ppts as easing supply chain pressures helped export growth offset import growth which was solid after two weak quarters. Additionally, there was decently strong support from the government consumption which expanded 4.7% QoQ SAAR, the strongest since the stimulus-laden Q1 2021. This segment contributed almost a full percentage point of growth to GDP (0.81 ppts) as both federal and state & local governments expanded their consumption.
The biggest news of the quarter is the strong consumer. Calls for a US recession relied on consumers (and businesses) to react to shy away from spending when interest rates surged. These calls included forecasts from the Fed which saw a slower economy helping them achieve its goal of reducing inflation. However, it seems that this foresight was overly pessimistic. While consumption could crash in an instant, it doesn’t appear that there are reasons to believe that this will happen. The labor market remains robust, and strong wage growth is providing consumers with robust income from which to draw. The business sector, on the other hand, has dialed back its activity in response to a rising cost of capital and an expected economic weakness. The large drawdown in inventories makes this clear. However, that could shift as the Fed eases away from rate hikes and spending remains stable. Looking ahead, it is hard to expect a recession in 2023. Growth will slow, but the current economic resilience suggests that GDP is unlikely to turn negative in the quarters ahead.
Still to come…
10:00 am (EST) - US Pending Home Sales Index
10:30 am - US EIA Natural Gas Report
11:00 am - US Kansas City Fed Manufacturing Index
4:30 pm - US Fed Balance Sheet
7:30 pm - Japan Unemployment Rate
7:50 pm - Japan Industrial Production
7:50 pm - Japan Retail Sales
9:30 pm - Australia PPI
10:30 pm - Bank of Japan Announcement
Morning Reading List
Other Data Releases Today
Italy's consumer confidence index edged up 0.4 pts to 105.5 in April. The current climate index grew 0.7 pts to 100.2, and the future climate index fell -0.2 pts to 113.3. Business confidence also improved 0.4 pts to 110.5.
The EU Economic Sentiment Indicator was unchanged at 97.3 in April, and the Employment Expectations Indicator fell -1.4 pts to 106.1. Consumer confidence continues to recover from its all-time low, up 1.7 pts to -18.9.
In the euro area, household real consumption per capita fell -1.2% QoQ in Q4 2022 after being flat in Q3 2022. Real income per capita also fell, down -0.5% QoQ in Q4 2022 after a -0.1% QoQ decline in Q3 2022.
Italy Consumer Confidence
Italy: April confidence data point to a decent second quarter (ING) - April's confidence data report is a relatively positive one, with confidence improving among consumers, builders and service providers, while falling back among manufacturers and retailers. Interestingly, they now all share expectations of a deceleration in inflation.
EU Consumer Confidence
Improvement in eurozone economic sentiment starts to level off (ING) - The European Commission's economic sentiment indicator stabilised in April, although the manufacturing sector is struggling. Inflation expectations have eased, suggesting that the peak in underlying inflation has been reached.
US Durable Goods Orders
Durable Strength in March (BMO) - Economic growth in the first quarter has proved to be remarkably resilient. Net exports were firmer, while the control measure of core shipments jumped more than expected in March.
Look Past Headline Durables Data, Growth in Core Orders Continues to Slow (Wells Fargo) - The 3.2% pop in durable goods orders in March was due almost entirely to a surge in aircraft orders. It is private-sector core capital goods orders that matter, which show a continued reversal in demand. Nondefense shipments data suggest some modest downside to Q1 equipment spending, which will print Thursday.
New Orders for Durable Goods Rose 3.2% in March (First Trust Portfolios) - New orders for durable goods surged 3.2% in March, easily beating consensus expectations. However, when you look past the headline, there isn’t much to like in the March report. The surge in orders was due to the volatile commercial aircraft category, which after plummeting a combined 60% in the first two months of 2023, rebounded 78.4% in March. Stripping out transportation, orders rose a tame 0.3% while prior month activity was revised lower
US
US Weekly Economic Commentary: Soft data paint mixed picture amid slowing economy (S&P Global) - In a week light on "hard" data, we left our estimate of first-quarter real GDP growth unrevised at 1.9%. Housing starts in March were somewhat above our expectations. Given the lag between starts and construction put-in-place, we raised our estimate of second-quarter growth, by 0.2 percentage point, from a contraction of 0.2% to no change (0.0%).
Companies are preparing for a recession: How about you? (DWS Group) - From an earnings resilience standpoint, the good news is that company managers are preparing for challenging economic conditions ahead. The not so good news is that many equity investors don’t appear to have adequately adjusted their portfolios or tolerance for high valuations given the growth risks and alternative opportunities of higher interest rates.
Heads Up: Newly Revised Sales Data Could Kneecap Q1 GDP Growth (Wells Fargo) - A revision to prior retail sales data published this week is a potential game-changer. If our interpretation of the latest revisions is correct, then real GDP growth for Q1-2023, which will be reported on Thursday morning, could come in at half the growth rate that is presently expected by the consensus.
Europe
ECB Watch: Undecided (Nordea) - The ECB is leaning towards a 25bp rate hike at the May meeting, but a heavy data batch released just ahead of the meeting could still tilt the scales in favour of a 50bp hike. In any case, the hike next week is unlikely to be the last.
Riksbank review: Dovish hike (Nordea) - The Riksbank today announced that the policy rate was hiked by 50bp, as widely expected. However, signals for the coming monetary policy meetings were more dovish than expected.
Czech National Bank Preview: Rates likely unchanged; hawks rear their heads (ING) - The Czech National Bank will likely keep interest rates unchanged at 7%. The future development of wages and government strategy for fiscal consolidation will play a crucial role in the possible easing of monetary policy in the future.
Spanish unemployment rate rises slightly (ING) - The Spanish unemployment rate reached 13.26% in the first quarter of 2023, slightly higher than the previous quarter. Although labour market dynamics are currently showing signs of strengthening in the short term, we expect further weakening later this year.
Swedish Labour Market: Strong start of 2023 (Nordea) - Employment increased more than expected in March and was up 0.9 percent over the quarter, much higher than forecasts. Unemployment decreased further.
China
China | The rise of China’s EV sector and its implications for the world (BBVA) - China has emerged as a global leader in the EV market. Its domestic market sales and exports value show China’s good performance in the sector. China will continue to be one of the top players in the global EV market.
Real Estate
Popularity of New Homes Stalls (NAHB) - Interest for new home construction was essentially unchanged between the final quarter of 2022 and the first quarter of 2023, as the share of prospective buyers looking to buy a newly built home barely edged from 20% to 21%. Meanwhile, the share interested in existing homes dropped from 39% to 37% during this period, while the share with no particular preference edged from 41% to 42%.
Share of FHA-Backed New Home Sales Climbs in Q1 2023 (NAHB) - NAHB analysis of the most recent Quarterly Sales by Price and Financing report published by the U.S. Census Bureau reveals that the share of new home sales backed by FHA loans jumped from 8.4% to 11.7% in the first quarter of 2023. It is the largest share since 2007 but remains 30% lower than the post-Great Recession average.
Commodities
Copper drops but prospects remain positive (Saxo Bank) - Copper range-bound since mid-January within a $3.75 to $4.20 range has seen a sharp decline this week, along with other industrial metals including iron ore and steel in response to a slower than expected recovery in Chinese demand and growth concerns elsewhere. In this update we take a look at the short-term outlook and why our long-held bullish view has not changed despite the current dark clouds.
Outlook
International Economic Outlook: April 2023 (Wells Fargo) - We have once again revised our global GDP forecast higher, and in our view, the global economy is moving further away from entering recession. With China's economy outperforming in Q1 and Eurozone growth prospects improving, we now forecast the global economy to grow 2.4% in 2023, up from 2.2% last month. The majority of global growth is set to come from Asia, specifically China and India, and we also no longer believe the Eurozone will enter recession this year.
Markets
Winter is over. Bonds are back. (Fidelity) - Higher yields enable bonds to once again play their traditional role as sources of reliable, low-risk income for investors who buy and hold them to maturity.
Preparing for the Pivot: Key Takeaways From Our 2022 Advisor Fixed Income Portfolio Review (PIMCO) - Many advisors who moved into cash last year as interest rates rose sharply are asking: When is it time to get back into longer-term fixed income investments and how?
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