May 7, 2023

US real GDP in 1Q23 grew at an annualized rate of +1.1% q/q, slower than the 2.0% expected. This was down from +2.6% in 4Q22.

The composition of real GDP growth in 1Q23 was: +1.1% = +2.5 consumption, +0.1 business investment, -2.3 inventories, -0.2 housing, +0.8 government spending, +0.1 net exports.

In contrast, the (revised) composition of GDP growth in 4Q22 was: +2.6% = +0.7 consumption, +0.5 business investment, +1.5 inventories, -1.2 housing, +0.7 government spending, +0.4 net exports.

Consumption grew at an annualized rate of +3.7% in 1Q23, up noticeably from +1.0% in 4Q22, and contributed +2.5 points to GDP growth (up from +0.7 points in Q4).

Business investment cooled off to a rate of just +0.7% in Q1, down from +4.0% in Q4, and contributed just +0.1 point to GDP growth, down from +0.5.

Businesses also drew down on inventories in Q1, drawing -2.3 points from GDP growth, after adding +1.5 points in Q4.

Residential investment continued to decline for the 8th straight quarter, falling at a rate of-4.2% in Q1. However, the rate of decline slowed noticeably from -27.1% in Q3 and -25.1% in Q4.

Government spending grew at a rate of +4.7% in Q1, up from +3.8% in Q4, and added +0.8 points to GDP growth. As in Q4, this was mainly led by a +10.3% increase in federal non-defense spending.

The US trade deficit continued to shrink for a 4th quarter in a row, resulting in an adjustment of +0.1 points to GDP growth. In contrast to Q4, when exports and imports both fell, in Q1 exports grew at a rate of +4.8% and imports grew +2.9%.

The PCE price index rose at an annualized pace of +4.2% q/q in Q1, up from +3.7% in Q4. Note that these are q/q figures giving a snapshot of current price momentum, NOT y/y rates.

Core PCE (excluding food and energy) rose at a pace of +4.9% q/q in Q1, up from +4.4% in Q4. Both this and the headline PCE suggest that inflationary pressures is remains stubbornly persistent.

As usual, the headline GDP figure conceals a lot going on under the hood. Consumption was surprisingly robust in Q1, but businesses are extremely cautious about investment and inventory levels, which is what really pulled the headline number down. The downturn in the housing market continues, but may be easing. Domestic federal spending is one factor keeping GDP growth positive. Inflationary price pressure has fallen off its peak, but remains stubbornly persistent.