Economic Data Tracker –
1Q23 growth softer than expected

Economic Data Tracker

April 28, 2023

Our weekly view on the economy including rationale on GDP, jobs report, and Fed policy decisions. Download the entire weekly edition to view timely charts and data providing a comprehensive picture of how incoming economic data affects our economic outlook.

Trend watch and what’s new this week

Air passenger traffic remains remarkably strong and is well beyond spring break. The weekly count was 16.3 million, staying above 16 million for the seventh straight week for the first time since the summer of 2019. It continues to track very closely with 2019 (slide 6), with year-to-date total passengers running 0.2% above four years ago.

The rest of the activity-based data (slides 5 and 6) has also improved in the weeks following the spring holidays, including hotel occupancy, temporary staffing, and rail traffic.

First quarter growth

On slide 7, we dig a little deeper into first quarter gross domestic product (GDP), which rose 1.1% on an annualized basis. That was despite the big drag from business inventories, which carved 2.26 percentage points off the first quarter growth rate. However, consumer spending surged 3.7%, it’s fast pace in seven quarters and added 2.48 percentage points. Nonetheless, the overall pace of 1.1% missed the consensus expectation of 2.0% and was dramatically slower than the fourth quarter growth of 2.6%.

Lack of supply driving new housing uptick

New housing metrics continue to show signs of life after being pummeled during most of 2022, declining in 8 of the 12 months. New homes sales (slide 8) jumped in March and rose for the third time in four months. Prices also for the rose for the third time in four months.

New orders for durable goods mixed as core orders sputter

On slide 9, new orders for durable goods—big-ticket items such as equipment, machinery, electronics, and office furniture—rose 3.2% in March. That was largely due to a 78% spike in commercial aircraft orders. But new orders for core capital goods, which excludes the volatile aircraft and defense components, fell 0.4%. That’s the fifth decline in the past seven months.

The Fed’s favorite gauge show inflation remains sticky

The Federal Reserves’ (Fed) favorite inflation gauge—the price index of core personal consumption expenditures—rose in August (slide 10). While it has been moving in the right direction and is down from its February high of 5.4%, it ticked higher month-over-month in March and rose 4.6% on a year-over-year basis. It remains uncomfortably high and well above the Fed’s 2% target, meaning there’s still a case for rate hikes to continue based on persistent inflation.

We also received real personal income and spending figures for March. Both of those are part of the so-called “big 4” indicators of economic activity used to determine a recession (slide 11). While the pace has slowed for all four, reflecting the sluggishness of the economy, the big 4 don’t indicate the U.S. is currently in a recession. That said, none of these are forward-looking indicators. 

Our take

The crosscurrents continue as most of the incoming data released during this past week had positives and negatives. Within the first quarter GDP report, for instance, consumer spending accelerated to its fast pace in seven quarters. Even the inventory drawdown, which was the big drag on overall growth, has positive implications insofar as lean inventories mean that any pickup in demand will require restocking.

Case in point has been new housing, where activity continues to improve due to extremely limited supply. Despite much higher mortgage rates and prices that are roughly 30% higher than pre-pandemic levels, the lack of supply is spurring a resurgence in housing activity.

Yet another inflation gauge – this time personal consumption expenditures (PCE) – indicates that inflation has been moving in the right direction but remains uncomfortably high and well above the Federal Reserve’s (Fed) 2% target. That means the Fed will remain focused on curbing inflation, aka price stability, especially amidst overall solid activity, albeit lower than 2022 levels.

While there’s plenty of reasons for the Fed to "pause“ their rate hikes, we suspect that they will likely raise rates by another quarter point (0.25%) at the May 3rd meeting to ensure that inflation is defeated.

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