Week in Review: First Quarter Economic Growth Continues but is Slowing…

Week in Review – Friday, April 28, 2023

First Quarter Economic Growth Continues but is slowing…

Gross domestic product, a measure of all goods and services produced for the period, rose at a 1.1% annualized pace in the first quarter, according to the Commerce Department, who reported Thursday. Economists had been expecting growth of 2%. The growth rate followed a fourth quarter in which GDP climbed 2.6%, part of a year that saw a 2.1% increase. Nonetheless GDP growth of 1.1% represented a third straight quarter of growth after output contracted in the first half of last year.

The slowdown in growth during the first three months of the year occurred as interest rate increases and inflation took hold of an economy that is largely expected to decelerate even further ahead. Growth in the first quarter was dragged down by weakness in housing and business investment, both of which are heavily influenced by interest rates. An inventory slowdown took 2.26 percentage points off the headline number, but that category is volatile and subject to big quarter-to-quarter moves.

The GDP report had some positive aspects, such as the sustained strong consumer spending that drives about two-thirds of economic growth. Inflation-adjusted consumer spending rose at a 3.7 percent annual rate in the first quarter, up from 1 percent in the prior period. Spending on services such as travel and dining out continued to rebound from the pandemic induced lows, while there was also a rise in purchases of goods following four consecutive quarters of decline. Overall, the consumer-driven aspects of the economy have remained remarkably resilient, supported by employment which has seen over 300,000 jobs added per month in the first quarter.

However, consumer spending slowed as the quarter progressed. Forecasters warn that it could weaken further amid headlines about layoffs, bank failures and warnings of a possible recession. Savings rates have been edging higher, a sign that consumers may be growing more cautious.

GDP release sparks optimism in equity markets, while bond markets face pressure from rising yields

In terms of the financial markets, equity markets responded positively to the GDP release, helping to lessen concerns of an imminent recession, and supported by better than expected first quarter corporate earnings reports. The bond market on the other hand has seen yields rise, putting pressure on bond prices, as continued growth in the economy is supportive of continued restrictive monetary policy.

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Investment Advice offered through Pallas Capital Advisors, LLC, a registered investment advisor.

Mark A. Bogar, CFA^®, CAIA^®
Chief Investment Officer
Pallas Capital Advisors

Stephen Kylander
Senior Portfolio Manager
Pallas Capital Advisors

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