US GDP growth slows unexpectedly at the start of 2023

According to the US Department of Commerce, gross domestic product expanded at a quarterly annualised pace of 1.1%.

Economists at Pantheon Macroeconomics had penciled-in a slowdown to a pace of 0.7% and before Thursday's release cautioned that the consensus estimate of 1.9% had likely not yet been fully updated and was therefore likely lower.

Furthermore, Commerce revised its previous estimate for fourth quarter GDP growth up from 2.0% to 2.6%.

Household consumption expanded at a clip of 3.7% (consensus: 4.0%), contributing 2.48 percentage points to the overall rate of GDP growth, while the rate of change in inventories subtracted 2.3 points.

According to Andrew Hunter, deputy US economist at Capital Economics, the latter implied scope for a smaller drag from inventories over the remainder of 2023.

And together with the 4.2% drop in residential investment, which followed a 25.1% fall during the previous quarter, it confirmed the message from other reports that while the economy was slowing - it was not collapsing.

Total fixed investment, which includes that in residential buildings, subtracted just 0.07 points from the rate of GDP expansion.

"Nevertheless, with most leading indicators of recession still flashing red and the drag from tighter credit conditions still to feed through, we expect a more marked weakening soon," Hunter said.

The contribution from external demand was 0.11 percentage points, while government consumption and gross investment added 0.81 points, of which 0.49 was at the federal government level.

On the inflation front, the price deflator for personal consumption expenditures picked up from the 4.4% rate seen during the fourth quarter to 4.9% (consensus: 4.7%).

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the core PCE reading implied a 0.5% rise in the month-on-month measure due out the next day, although he was sticking with his forecast of 0.3%.

"The trend in the monthly core PCE gains is slowing, but it has not yet slowed far enough, especially in the core services ex-rent component, to reassure the Fed," he added.

As regarded activity, he pointed out that faced with uncertainty consumers might opt to save more and that several tailwinds were now fading, so that consumption might fall outright during the second quarter.

The pace of government outlays was "unsustainable", the outlook for business capex was weak, and the inventory correction was set to continue in Q2, he added.

"Welcome to the recession."

-- More to follow --