The US economy grew less briskly than expected in Q1, the advance read on first quarter growth, released on Thursday, showed.
The 1.1% pace fell well short of the 1.9% consensus estimate. The range, from nearly six-dozen economists who ventured a guess, was 0.4% to 3.5%.
It was the slowest annual rate since last year’s non-recession, when consecutive quarterly contractions were written off as meaningless for the purposes of recession-spotting.
As a quick, but always helpful, reminder: There’s no such thing as a “technical recession.” The NBER decides what’s a recession and what isn’t, and it’s in many ways a subjective judgement. So, no, last year’s swoon wasn’t a “technical recession.” Because very much contrary to popular belief, “technical recession” isn’t a real thing.
I dare say Thursday’s headline GDP miss will be welcome news at the Fed, where officials are anxious about the prospect of above-trend growth at a time when monetary policy is explicitly aiming for the opposite. The hotter-than-expected readings on price growth that accompanied Thursday’s update won’t be welcome, though.
The Fed doesn’t want a proper recession, but then again, maybe they do. Or at least if it means averting a scenario where the US becomes a “5% inflation country,” as Larry Summers put it+ this week.
Before anyone writes the economy off, note that personal consumption rose 3.7% in Q1. That was likewise below expectations, but still counted as very robust. Indeed, the spending print was the strongest since mid-2021.
Within goods, the leading contributor to consumer spending was motor vehicles and parts, and within services, the increase was led by health care and food services and accommodations, the government said.
Business spending, by contrast, was tepid. The 0.7% increase paled in comparison to Q4’s 4%. The slowdown likely reflected nervous management teams and efforts to control other costs amid elevated wage bills and expectations for less pricing power.
Spending on equipment contracted more than 7%, the most since Q2 2020, when the economy experienced an induced depression.
Residential fixed investment fell 4.2%, attributable to a decrease in new single-family construction. Q1 marked the eighth consecutive quarter during which residential investment weighted on growth.
The breakdown by contribution showed the drag from inventories nearly negated the contribution from spending.
From a kind of 30,000-foot view, the juxtaposition between a lackluster headline GDP print and above consensus reads both on the price index (4% versus 3.7% expected) and core PCE prices (4.9% versus 4.7% seen and 4.4% in Q4), looked suspiciously like stagflation.
Meanwhile, jobless claims came in below expectations at 230,000, while continuing claims were lower than anticipated as well.
Until inflation is under control, GDP growth and the possibility or occurrence of recession(s) should be irrelevant to the Fed. I remember the 1970s and 1980s and the Fed cannot afford the previous policy errors on inflation.
You have to be 60 to understand what stagflation is in the US. It took more than three decades for inflation to resurface so it’s not a phenomenon a lot of investors are familiar with.