The Bureau of Economic Analysis has released an estimate indicating that the real GDP increased by 1.1 percent in the first quarter of 2023. This is a slight decrease from the previous quarter’s 2.6 percent increase. The increase was mainly driven by consumer spending, exports, and government spending, but was partly offset by decreases in private inventory and residential investment.
This suggests that businesses are not investing as much in inventory and construction, which may be a sign of uncertainty or caution in the economy.
The report revealed that the personal consumption expenditures price index, which is a measure of inflation closely monitored by the Federal Reserve, rose by 4.2%. This is higher than the expected increase of 3.7%.
If we remove the prices of food and energy, we get the core PCE index, which is also an important inflation measure. The core PCE index rose by 4.9% during the period, which is higher than the previous increase of 4.4%.
Today's 1.1% Q1 #GDP growth confirms the economy is getting weaker as #inflation is getting stronger. The #Fed has already lost its war against inflation. Inflation won and the U.S. economy lost. The Fed's next move will be to "rescue" the economy by creating even more inflation.
— Peter Schiff (@PeterSchiff) April 27, 2023
In other words, prices for goods and services that consumers regularly buy have increased more than expected, which can erode purchasing power and lead to higher interest rates as the Federal Reserve may adjust its policies to control inflation. The increase in the core PCE index indicates that the rise in inflation is not just due to higher food and energy costs but also affecting other sectors of the economy.
Citigroup economist Veronica Clark said, “People were still spending even despite higher prices, even despite higher inflation and a big drag that we had from inventories. Overall, I think it’s a relatively inflationary report, even though the headline GDP number a bit softer. All of those signs that demand is still strong and prices are still rising were very much present today.”
— Elon Musk (@elonmusk) April 21, 2023
“We would have expected to see some more slowing at this point, though you’re definitely getting signs that you’re on the margin,” Clark continued. “So it doesn’t look like we’re going to be immediately slowing into a recession. And I think this Q1 data definitely helps to confirm that, especially [since] consumption is still so strong.”
The economic growth slowdown was caused by two main factors. First, there was a decline in private inventory investment (businesses are not investing as much in stockpiling goods). Second, there was a deceleration in nonresidential fixed investment (businesses are not investing as much in buildings, equipment, and other long-term assets).
The decline in private inventory investment had a significant impact on the overall economic growth, reducing it by 2.26 percentage points. This means that if it weren’t for the decline in inventory investment, the growth rate would have been higher.
Despite the slowdown, there were some positive indicators in the report. Consumer spending, as measured by personal consumption expenditures, increased by 3.7%, which suggests that people are still buying goods and services. Additionally, exports were up by 4.8%, which means that businesses are selling more products overseas.
Total GDP growth between 2000 and 2020:
🇨🇳 China: 1266%
🇷🇺 Russia: 466%
🇮🇳 India: 440%
🇧🇷 Brazil: 316%
🇸🇦 Saudi: 300%
🇦🇺 Australia: 250%
🇹🇷 Turkey: 250%
🇰🇷 South Korea: 220%
🇿🇦 South Africa: 200%
🇮🇩 Indonesia: 175%
🇨🇦 Canada: 166%
🇺🇸 USA: 108.7%
🇬🇧 UK: 85.7%
🇩🇪 Germany: 77%
— World of Statistics (@stats_feed) April 23, 2023
However, the report also showed that gross private domestic investment, which measures how much businesses are investing in themselves, tumbled by 12.5%. This indicates that businesses are not as optimistic about future growth prospects, and may be holding off on long-term investments.
It is difficult to predict with certainty what to expect in the future. However, some possible implications can be drawn. The decline in private inventory investment and nonresidential fixed investment may indicate a cautious approach by businesses due to uncertainty about the future, which could potentially lead to slower economic growth in the future.
Moreover, the increase in inflation, as indicated by the rise in the personal consumption expenditures price index and core PCE index, may lead to higher interest rates and changes in Federal Reserve policies to control inflation.