Revised GDP data shows surprise growth
The final release of Q1 GDP confirmed that the economy lost momentum in the first quarter, but to a much more limited degree than previously reported. GDP increased at a 2.0% annual rate, down fractionally from the 2.1% pace over the course of a volatile 2022 that peaked in Q3 before downshifting. The upside surprise easily topped the consensus forecast that called for quarterly growth of about 1.4%, which had been roughly in line with the second estimate of 1.3% growth for the quarter.
Revised trade data accounted for the unexpected upward revision to Q1 growth. Net exports had been effectively flat in the previous release but tacked nearly 0.6% of a point to top-line growth in today’s release. Notably, the improvement was evident on both sides of the trade ledger, with exports coming in stronger than previously reported and imports being trimmed.
Though updated trade data accounted for difference, the underlying drivers of growth hardly changed. A rebound in household spending powered a broad surge in personal consumption that spanned both goods and services. Strong labor market conditions and the massive cash stockpile accumulated in recent years provided the fuel. Declining consumer inflation also provided some reassurance that a return to a more stable price environment may finally be visible on the horizon.
One bellwether indicator of the health of the consumer remained constrained, as residential investment contracted for the eighth consecutive quarter. Rising home prices and surging mortgage interest rates have been significant headwinds to the sector despite pent-up demand that easily outstripped a dearth of supply in single-family homes. The decline in Q1 was modest though, and there are growing signs of a rebound in housing, which suggests that it could become a positive contributor in the near term.
Despite the upside surprise in Q1 growth, questions persist around the near-term economic outlook. Manufacturing activity continues to weaken, with new orders now contracting to a degree that’s typically consistent with the onset of recession. The much larger service sector is still expanding but at a slower pace. A range of leading indicators point to a meaningful probability of recession in the coming quarters at the same time that the Federal Reserve ups the ante on rate hikes as they continue to wage their focused fight to tame inflation.
Even so, the fact that the “most anticipated recession in history” has yet to materialize is raising questions about whether this time might be different. The recent improvement in consumer confidence suggested that — at least at the margins — more consumers believe that a soft landing may still be in the cards. Declining inflation has certainly helped, while the surprising resilience of the labor market supports spending.
Still, the yield curve remains deeply inverted and strains are showing in credit creation and more broadly within the banking sector. Purchasing manager surveys spanning both manufacturing and services continue to soften, pointing to more weakness in the coming months. The full extent of those dimmed expectations may not yet be consistently apparent in the hard data but don’t point to a rebound in growth in the near term.
The bottom line? A third revision to GDP data that reflects the picture from three months ago might not be the most meaningful data point for the markets or economists currently. Nonetheless, it helps to provide context around the contours of what has been an unusually volatile path for the economy in recent years. What lies ahead remains the greater question, as a swathe of data raises questions about economic momentum and suggests an elevated probability of recession ahead. Other indicators may still point to a potential soft landing — still a possibility, but one that would appear unlikely within the context of a preponderance of the data and its historical comparisons. This time may, in fact, be different, but it’s far too early to conclude that likelihood.
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