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Another quarter, another Rorschach test on the state of the American economy.
Surprisingly slow GDP growth stole all the headlines following Thursday's release of new data from the US Commerce Department, but peel back a layer or two and there are plenty of signs of resilience. At this point, it may be worth asking: is this what a soft landing feels like?
Spend, Baby Spend
Growth did slow down in the first three months of 2023. Perhaps quite considerably. GDP increased by 1.1% over the quarter, down from 2.6% in the final three months of 2022 and well below most economists' expectations of 2%. It's easy to see why: non-residential fixed investment (aka how much businesses are spending on themselves) increased at an annualized rate of 0.7%, considerably lower than the 4% growth it posted in the previous quarter, and likely a reflection of increased borrowing costs. That's also the most obvious culprit for the over 5% dropoff in pending home sales, the biggest drop since September, according to National Association of Realtors data also published on Thursday.
That's the bad news. The good news is that there are plenty of reasons to believe the slowdown was temporary. Chief among them is a huge swing toward businesses relying on inventories rather than producing new goods, and thus not contributing to GDP. It's also a trend that's likely to reverse quickly if businesses continue to satiate the high demands of a shockingly resilient US consumer base:
- Consumer spending jumped by 3.7% in Q1, its highest quarterly leap in nearly two years, as Americans continued to tap pandemic savings. Spending on goods jumped nearly 7% (also a two-year peak), while spending on services also continued to grow.
- Undergirding that robust spending is the continued strength of the job market. While jobless claims increased slightly, the unemployment rate is still hovering at near historic lows.
"Really peeling back the layers, it is very positive in terms of consumer spending," Kristina Hooper, Invesco's chief global markets strategist, told the Financial Times. Of course, that comes with a Fed-tinged caveat: "Seeing a robust amount of consumer spending can raise concerns that that is going to fuel more Fed rate hikes."
Around the World: The US' growth slowdown is something of an outlier on the global stage. China reported annual growth of 4.5% earlier this month, as consumer spending continues to rebound dramatically following the lifting of strict zero-Covid policies. In Europe, Belgium and Sweden posted GDP numbers better than expected on Thursday, while the rest of the eurozone is projected to show annual growth as well.