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US GDP growth slows sharply in the first quarter

In the first quarter of 2023 US real GDP expanded at an annualised rate of 1.1%, according to the initial estimate from the Bureau of Economic Analysis—down significantly from 2.6% growth in the fourth quarter of 2022. However, the headline figure masks diverging trends; private consumption growth surged to 3.7% (annualised), up from just 1% in the final quarter of 2022, but this was largely offset by a steep decline in private inventory investment.  

US economic data were mixed throughout the first quarter, suggesting that the US economy is at a turning point, coming out of a year of robust (but unsustainable) growth in 2022 and heading into a slowdown. These mixed signals complicate the task facing the Federal Reserve (Fed, the central bank) as it seeks to reduce still-high inflation without unnecessarily deepening the economic slowdown.

On the surface, robust private consumption in the first quarter suggests that the Fed has more work to do to dampen consumer demand, and therefore inflation. However, even this story was mixed: strong consumption growth was largely a January story, supported by a one-off surge in real personal incomes at the start of the year. This, in turn, pushed up real consumption expenditure by 1.4% month on month, reversing modest declines in November-December 2022. We do not expect this pace of growth to continue; real personal consumption fell month on month in February and remained flat in March.

Private consumption added 2.5 percentage points to overall GDP growth in the first quarter of 2023, up significantly from its average of 1.1 points per quarter in 2022. However, this was offset by falling inventory investment, which subtracted 2.3 percentage points from first quarter growth.

The jump in consumption expenditure would have supported higher first-quarter GDP growth, but it was largely offset by a steep decline in private inventory investment. Inventory declines were the sharpest in wholesale trade (wholesalers have already been hit by softer demand in recent months, and may therefore be replenishing stocks at a slower rate) and in manufacturing. Activity in the manufacturing sector has already been slowing for several months; thus far, the impact on overall GDP has been masked by still-strong consumption, but we expect the two sectors to turn down in tandem from the second quarter. Fixed investment more broadly has declined since the second quarter of 2022, led by slowing activity in the housing sector.

US manufacturing indices have been in decline for several months. The production sub-index has been in negative territory since December 2022 and the sub-index for new orders has been contracting since September. This has also helped to bring down order backlogs, which have declined since October 2022, and manufacturing producer prices, which fell in March.

We continue to expect a mild technical recession in the US, with two consecutive contractions in the second and third quarters. Falling personal consumption is expected to drive this downturn as the full weight of monetary tightening over the past year comes to bear. Manufacturing and fixed investment are only forecast to recover meaningfully around mid-2024, once interest rates start to fall. Softening consumption data make it more likely that the Fed will pause its tightening cycle after a 25-basis-point increase in May. 

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