We received a couple more critical ingredients in the economic alphabet soup this week with the release of Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) numbers. The Q1 2023 advanced GDP print was up first, showing a disappointing 1.1% increase, well below expectations of 1.9% and the 2.6% growth seen in Q4 2022. However, despite the underwhelming headline, a deeper look into the data reveals promising underlying growth trends. In addition, PCE data was released Friday and was a bit disappointing.
Despite the underwhelming headline number, a deeper look into the data reveals promising underlying growth trends. As discussed in January, the highly regarded subcomponent final sales to private domestic purchasers grew at a robust 2.9% annualized rate. This was the fastest pace since Q2 2021, when the post-COVID recession rebound was in full swing, and comes after a flat performance in the previous quarter, indicating a solid start to 2023. Moreover, this is illustrated by the strong performance in personal consumption expenditures, up 3.7%. So with these substantial numbers, what drove the numbers below expectations? It was inventory, another GDP component discussed in January. As a reminder, inventory changes are a highly volatile component of GDP and are generally not expected to continue (positively or negatively) relative to underlying economic performance. Gross private domestic investment was down -12.5%, with private inventories contributing -2.3% to total GDP. Said another way, without the impact of the erratic inventory numbers, GDP would have been up 3.3%, a lot different than the 1.1% reported.
This is not to say we are out of the woods or that the “all clear” is being signaled. Further revisions to GDP will be published over the next two months, and the current picture might change. However, the initial reading suggests a different outlook than a typical pre-recession GDP print, reflecting a more robust consumer than expected. In addition, it’s another reminder that you need to get past the attention-grabbing headlines and into the details to gain a clearer picture of what is going on.
Moving to PCE prices, specifically Core PCE, the Federal Reserve’s preferred gauge to measure inflation, rose by +0.3% MoM in March, in line with market expectations and the prior month’s pace. On an annual basis, the inflation rate slowed to 4.6%, slightly above expectations of 4.5% but matching the 13-month low from December 2022. The report was somewhat disappointing, as the resilience in U.S. inflation appears to support the Federal Reserve’s aggressive tightening path and signals that borrowing costs will likely remain elevated through the end of the year.
Another negative for the inflation narrative was personal income, which saw a +0.3% increase in March, maintaining the same growth pace as in February and slightly exceeding market expectations of a +0.2% rise. Increased compensation, private wages, and salaries drove the growth. The continued uptick in personal income further supports domestic demand, overall economic growth, and the potential for more stubborn inflation.
While the GDP and PCE figures might appear disappointing at first glance, a closer examination of the data highlights some promising underlying trends. The growth in final sales to domestic purchasers and the continued wage increases suggest the consumer may be faring better than expected. This could ultimately lead to a better economic outcome, even if inflation remains elevated for a bit longer.
Economy
- U.S. equity markets were up after a volatile week ending April 28, with the S&P 500 up +0.9%, the Nasdaq up +1.3%, and the small-cap Russell 2000 down -1.3%. There were a few big releases this week, including GDP, PCE, Michigan Consumer Sentiment and home price data.
- The Dallas Federal Reserve Bank’s general business activity index for manufacturing in Texas experienced a drop to -23.4 in April 2023 from -15.7 in March, marking a nine-month low and falling short of market predictions of -14.6. The production index decreased slightly (0.9 vs. 2.5), while the new orders index remained negative for the 11th consecutive month (-9.6 vs. -14.3).
- In February 2023, the S&P CoreLogic Case-Shiller 20-city home price index in the U.S. rose by 0.4% year-on-year, marking the smallest increase since 2012. This contrasts the 2.6% growth in January and the market expectation of no change.
- In April 2023, the University of Michigan’s consumer sentiment for the U.S. rose to 63.5 from 62 in March, consistent with preliminary estimates. Both current conditions (68.2 vs. 66.3 in March) and expectations (60.5 vs. 59.2) experienced an increase. Concurrently, the inflation forecast for the upcoming year surged to a five-month high of 4.6%, up from 3.6%, while the five-year measure increased to 3% from 2.9%. Despite consumers being exposed to increasingly negative news about business conditions, their short-term and long-term economic outlooks exhibited modest improvement compared to the previous month.
Stocks
- U.S. equities were in positive territory. Communication Services and Technology were the top performers, while Utilities and Industrials lagged. Growth stocks led value stocks and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 12 basis points to 3.45% during the week.
- Global bond markets were in positive territory this week.
- Government bonds led for the week, followed by corporate bonds and high yield bonds.
