Evening Brief – 04.27.23

With the Atlanta Fed GDPNow recently showing a clear economic slowdown, revealing estimates of growth sliding from over 3% in late March to just 1.1%, the trend is evident: the US economy is slowing, in large part due to the regional bank tumult that has seen loan issuance grind to a halt.

With most analysts expecting a number just around 2%, real GDP rose just 1.1% in the first quarter, and a big drop from 2.6% in the fourth quarter. It was also the lowest read since the second quarter of 2022 when there was -0.6% growth.

The slowdown largely reflected a downturn in inventory and business investment. These movements were partly offset by an acceleration in consumer spending, a smaller decrease in housing investment, and an upturn in exports. Imports also turned higher.

But it was the drop in private inventories that wreaked havoc on the overall number. Specifically, in the first quarter, private inventories subtracted a staggering 2.3% from GDP.

But while growth came in well below expectations, the other concerning data was the unexpectedly hot PCE (4% vs 3.7% expectations and higher than the 3.9% in the fourth quarter) and core PCE (4.9% vs 4.7% and well above the 4.4% in the fourth quarter). This was the 5th consecutive “beat” of median core PCE expectations.

The Treasury market remains focused on inflation and the bear steepening of the yield curve we saw today was right in line. But the PCE Deflator due out on Friday will likely confirm the much-anticipated quarter-point rate hike on May 2, and potentially leave the door open for another hike in June, although the odds remain low as of today.

The data presented a worst-of-both-worlds scenario, with growth down and inflation up. Given that Core PCE is nowhere near the Fed’s 2% target, the Fed may need to keep raising rates, raising them right into a slowdown. The result would be stagflation.