Commentary Directory

Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption

Jacob Hess
April 27, 2023

What recession? The US economy grows for the third straight quarter after the technical recession experienced in the first two quarters of 2022. US GDP grew 1.1% QoQ SAAR in Q1 2023 which is slower than the 2.6% in Q4 2022 but still a strong reading considering the interest rate situation. Personal consumption was strong, growing 3.7% QoQ SAAR which surpasses consumption growth in each 2022 quarter. The surge in durable goods new orders seen through the months of Q1 translated to a strong durable goods spending component which grew at a rate of 16.9%. This is the first quarter of growth for durables since Q1 2022 and the first quarter for general goods spending growth since Q4 2021. Services spending also expanded to start the year, up 2.3% QoQ SAAR, stronger than Q4 2022 services consumption growth of 1.6% QoQ SAAR. Consumers continue to surprise us. Despite interest rates ballooning over the last year, spending is as strong as in normal times. It seems like there was a slight boost in activity thanks to some warmer weather in the latter part of the winter, and the lingering of excess savings is apparently still strong enough to keep people buying things. Overall, consumption added 2.48 ppts to headline GDP growth, the strongest contribution since GDP bounced back after the pandemic in Q2 2021.

Offsetting the growth in consumption was a dismal investment number. Gross private domestic investment fell -12.5% QoQ SAAR. The number looks bad at first glance but fixed investment only fell -0.4% QoQ SAAR in the quarter. This includes further downsizing in firms’ investment in residential structures (residential investment -4.2% QoQ SAAR) that was mostly offset by nonresidential investment, up 0.7% QoQ SAAR, which benefitted from strong nonresidential structure investment, up 11.2% QoQ SAAR. The nonresidential strength likely comes from a rebound from the weak numbers a year and a half ago when supply in the sector was really low. The main reason why gross domestic investment fell so sharply was a decline in private inventories which was largely expected after the inventory growth in Q4 2022. Private inventories contributed -2.26 ppts to headline GDP which almost entirely accounts for the -2.34 ppts contribution made by private investment as a whole.

Outside of these two categories, which had large, offsetting contributions, we find that net exports made a small contribution of 0.11 ppts as easing supply chain pressures helped export growth offset import growth which was solid after two weak quarters. Additionally, there was decently strong support from the government consumption which expanded 4.7% QoQ SAAR, the strongest since the stimulus-laden Q1 2021. This segment contributed almost a full percentage point of growth to GDP (0.81 ppts) as both federal and state & local governments expanded their consumption.

The biggest news of the quarter is the strong consumer. Calls for a US recession relied on consumers (and businesses) to react to shy away from spending when interest rates surged. These calls included forecasts from the Fed which saw a slower economy helping them achieve its goal of reducing inflation. However, it seems that this foresight was overly pessimistic. While consumption could crash in an instant, it doesn’t appear that there are reasons to believe that this will happen. The labor market remains robust, and strong wage growth is providing consumers with robust income from which to draw. The business sector, on the other hand, has dialed back its activity in response to a rising cost of capital and an expected economic weakness. The large drawdown in inventories makes this clear. However, that could shift as the Fed eases away from rate hikes and spending remains stable. Looking ahead, it is hard to expect a recession in 2023. Growth will slow, but the current economic resilience suggests that GDP is unlikely to turn negative in the quarters ahead.