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- Gross Domestic Product declined at a 1.4% annual rate in the first quarter, far below the 1% consensus forecast.
- Equities, Treasury yields and the dollar rally as underlying growth appears strong.
- Federal Reserve rate policy and May hike should be unaffected.
Economic growth in the US contracted for the first time in two years, shrinking at a 1.4% annualized pace in the first quarter after expanding 5.7% in 2021 with the best yearly performance since 1984.
The surprise decline was worse than the already low 1% forecast of the Reuters survey and even missed the Atlanta Fed GDPNow estimate of 0.4%. From the first quarter of last year the economy grew 3.6%.
Despite the steep deceleration in growth from 6.9% in the fourth quarter, equities rallied sharply and Treasury yields and the dollar saw modest gains as traders noted several negative factors that are unlikely to be repeated in future quarters.
Trade and inventory
The trade deficit widened in the first two months of the quarter as importers sought to overcome supply-chain problems and exports fell. In the government’s economic accounts trade deficits subtract from GDP. Businesses slowed inventory acquisition from the rapid pace in the second half of last year. Together these two items, trade and inventories reduced first quarter growth by about 4%. Real final sales, a category that excludes trade and inventories, accelerated to a 2.6% yearly rate.
Government spending has also faded as the stimulus and infrastructure packages from last year reached the end of their funding.
Consumer spending, the warp engine of the US economy, expanded at a 2.7% annual rate in the last quarter, compared to 2.5% in the fourth quarter. Purchases of consumer goods were little changed while spending in the service sector added 1.9% to GDP.
Business investment for equipment and research and development was robust, rising 9.2%. Private demand expanded at a 3.7% rate in the first quarter, more than double the 1.8% pace the Fed considers likely over the long-term.
Markets
Stocks were dramatically higher with the Dow gaining 1.85%, 614.46 points to 33,916.39 and the S&P 500 adding 103.54 points, 2.47% to 4,287.50. The Nasdaq was the equity leader, rising 3.06%, 382.60 points to 12871.60, helped by a strong earnings report from Meta Platforms, the parent company of Facebook.
S&P 500
CNBC
Treasury yields rose modestly with the 10-year about 1.5 basis points higher at 2.832% and the 2-year climbing 5 points to 2.629%.
The US dollar rose in all major pairs except the USD/CAD where the loonie was buoyed by a 2.6% gain in West Texas Intermediate (WTI) to $104.20 and the Bank of Canada’s (BoC) recent and anticipated rate increases.
The EUR/USD closed at 1.0498, its first finish below 1.0500 since early January 2017.
Dollar yen rose 1.8% on the day, ending at 130.80, its highest in two decades as the Bank of Japan (BoJ) reaffirmed its dovish monetary policy on Thursday in Tokyo. The USD/JPY is up a remarkable 13.9% since the open at 114.81 on March 7 fueled by the surge in US Treasury rates while yields on Japanese Government Bonds (JGB) have been largely unchanged.
The USD/CAD dropped 19 points to 1.2805. The AUD/USD dropped 0.4% GBP/USD fell 0.6% even though the Reserve Bank of Australia (RBA) and the Bank of England are expected to hike rates 25 basis points and 15 basis points next week.
The GDP report is not expected to alter the Federal Reserve’s plans for a 0.5% increase at Wednesday’s meeting. Treasury futures predict an 81.5% chance that the fed funds rate will be at 2.75% or higher by this year’s final Fed Meeting on December 14.
Conclusion
Inflation is the economy’s wild card.
So far the year-long tidal wave of price increases washing over every sector of the consumer economy has not deterred household spending. One key to consumer resilience is the job market. Employment is easy to find. The number of positions on offer has averaged over 11 million for ten months, an all-time record. Unemployment claims were 180,00 in the latest week, also very near the record low, and wage gains are strong. Average Hourly Earnings were up 5.6% in March, though that was overwhelmed by the 8.5% headline inflation rate. Over the prior year consumers lost 2.7% in purchasing power.
As long as Americans continue to fund the economic expansion, the Fed’s hope that it can curtail inflation without instigating a recession can remain alive.
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