Economic Outlook – 30 April 2023

The Bureau of Economic Analysis put out its first estimate of Q1 GDP growth. The economy reportedly expanded 1.1% annualized in the quarter, undershooting the median economist forecast calling for a +1.9% print. This gain being weaker than potential, the output gap widened from 0.9% to 1.1%. Domestic demand strengthened in the three months to March as strong gains for personal consumption (+3.7% QoQ annualized), investment in structures (+11.2%), and investment in intellectual property (+3.8%) were only partially offset by declines for investment in equipment (-7.3%) and residential investment (-4.2%). Government spending (+4.7%) contributed to growth in the quarter. For the first time since 2020Q4, goods consumption (+6.5% QoQ annualized) grew more than spending on services (+2.3%), which suggests that the post-pandemic rebalancing towards the latter may be over. Trade had but a very small positive impact on growth (+0.11 percentage point), as a 4.8% annualized increase in exports was almost completely offset by a 2.9% gain for imports. Inventories, for their part, subtracted a whopping 2.26 percentage points from the overall growth figure GDP data came in weaker than expected in Q1. This was due in large part to a sizeable negative contribution from inventories, but other sectors of the economy showed signs of weakness as well. Investment in machinery and equipment, for instance, contracted for the third time in four quarters, while residential investment recorded its eighth consecutive decline as it continued to feel the effects of aggressive monetary policy tightening. On the other hand, household consumption growth accelerated and was at its strongest since 2021Q2. Spending on goods rose at a particularly brisk pace, as an easing of supply chain constraints contributed to boosting auto sales during the quarter. A strong showing by households helped final sales to private domestic purchasers expand 2.9%, the most in nearly two years Nominal personal income increased 0.3% in March, a bit more than the median economist forecast calling for a 0.2% gain. Amid a labour market that remains healthy, the wage/salary component of income progressed 0.3%, while income derived from government transfers stayed more or less unchanged. Personal current taxes, for their part, retraced 0.1%. All this translated into a 0.4% gain for disposable income. Nominal personal spending, for its part, stayed flat in the month instead of edging down 0.1% as per consensus. However, this positive surprise was offset by a revision to the previous month’s result, from +0.2% to +0.1%. Outlays on services advanced 0.4% but this gain was completely offset by a 0.6% drop in the goods segment. As disposable income advanced at a faster pace than spending, the savings rate rose from 4.8% to a 15-month high of 5.1%. This remains significantly below the levels observed before the pandemic (between 8.5% and 9.0%) The headline PCE deflator came in at 4.2% YoY, down from 5.1% the prior month but still one tick above consensus expectations. This was the lowest level recorded in 22 months. The core PCE measure, meanwhile, eased from 4.7% to a 17-month low of 4.6%, matching consensus expectations. On a monthly basis, the headline index crept up 0.1% while the measure excluding food and energy rose 0.3%. The all-important core services excluding housing segment, which the Fed considers a good gauge of underlying price pressures, recorded its smallest monthly gain in 7 months (+0.24%). On a 3-month annualized basis, it went from 5.5% in February to 4.6% in March. Although this was positive news, the Fed is not expected to declare victory on the inflation front on the basis of a single month’s report. It is instead likely to wait for a clear and lasting downtrend to take hold, which could take a few more months Durable goods orders blew past consensus expectations in March, surging 3.2% MoM. Orders in the transportation category jumped 9.1% on gains for civilian (+78.4%) and defense aircraft (+10.4%). Excluding transportation, orders advanced a much more subdued 0.3%, erasing the prior month’s decline. The reportshowed, also, that orders for non-defense capital goods excluding aircraft, a proxy for future capital spending, decreased 0.4% MoM, their fourth decline in five months. On a three-month annualized basis, “core” orders were down 1.2%. This hints at a significant slowdown in machinery and equipment investment in the second quarter of the year The Conference Board Consumer Confidence Index fell from 104.0 in March to a nine-month low of 101.3 in April. The median economist forecast was for the index to stay put at 104.0. The monthly decline reflected less optimistic longer-term expectations. Indeed, the sub-index tracking sentiment towards the next six months sank from 74.0 to 68.1. A smaller proportion of respondents had a positive outlook on business conditions (from 16.4% to an 11-and-a-half-year low of 13.5%), employment (from 15.5% to a 7-year low of 12.5%), and income (from 16.2% to 15.7%). Also, less people were planning to buy a home (from 6.0% to 5.0%), an automobile (from 11.0% to 9.5%), or a major appliance (from 44.8% to an 11-and-a-half-year low of 41.0%) Sales of new homes jumped 9.6% in March to a one-year high of 683K (seasonally adjusted and annualized), overshooting by far the 632K print expected by economists. The monthly increase was accompanied by a dip in the number of homes available on the market (from 434K to 432K). With sales up and supply down slightly, the inventory-to-sales ratio fell from 8.4 to 7.6, which nevertheless remained above this indicator’s long-term average The S&P CoreLogic Case-Shiller 20-City Home Price Index rose for the first time in eight months in February, edging up 0.06%. Prices increases in Los Angeles (+0.6%), Atlanta (+0.5%), and Denver (+0.4%) were almost completely offset by declines in Las Vegas (-0.9%) and Seattle (-1.5%). YoY price appreciation slowed from 2.6% to an 11-year low of 0.4% The Employment Cost Index (ECI) increased a hotter-than-expected 1.2% in the first quarter, translating to a 4.7% annualized pace. Wages & salaries and benefits for all workers each rose 1.2% over the quarter, suggesting compensation costs are not cooling as much as the average hourly earnings data indicate. While moderating job openings and hiring plans are being met with stronger labor force participation, there is much further to go before labor costs are consistent with 2% inflation Troubled California-based lender First Republic Bank reported $100 billion in deposit outflows in the first quarter, reanimating fears over the bank’s survival. A mismatch between First Republic’s assets and liabilities produced big losses as interest rates spiked, resulting in a run-on uninsured deposits. After the failures of Silicon Valley Bank and Signature Bank, a consortium of larger banks placed $30 billion on deposit with First Republic in an effort to stanch the deposit bleed but was unable to put the bank back on firm footing. Various public and private rescue plans for the company were floated this week but none have been put into action. Some investors fear that banks with similar asset–liability mismatches will continue to stress the system so long as monetary policy continues to tighten. Also, credit rating agency Moody’s downgraded a number of US regional banks. One a bright note, demand among foreign central banks for dollar liquidity from the US Federal Reserve has declined. As a result, the Fed will reduce the frequency of its liquidity auctions to once a week The US House of Representatives passed a bill raising the nation’s debt ceiling while cutting spending. The vote was 217 to 215, with four GOP representatives voting against. The measure has no prospect of passage but puts pressure on President Joe Biden to come to the negotiating table. Biden said on Wednesday that he is willing to meet with Speaker of the House Kevin McCarthy over the debt limit but said that not raising the limit is off the table Stocks recorded mixed returns as attention focused on the season’s busiest week of quarterly earnings reports. Almost 35% of S&P 500 Index companies, which together represent 44% of its market capitalization, were scheduled to release results during the week. On Thursday, gains in just four stocks—Microsoft, Apple,, and Facebook parent Meta Platforms—accounted for nearly half of the S&P 500’s strong gain (the biggest since January 6), after Meta jumped 14% on an earnings beat. Cyclical sectors generally performed poorly, however, as investors weighed several new signs of an economic slowdown, particularly in the manufacturing sector. Early in the week, several measures of regional manufacturing activity came in well below expectations and indicated that factories were cutting back on production in April. Investors also seemed worried by a negative outlook for shipping volumes from United Parcel Service, which tumbled 10% Tuesday on the news In terms of data release, the construction spending is out on Monday. In February, the construction sector experienced its ninth consecutive monthly decline in residential outlays, in part the cause of the 0.1% MoM decline in total construction spending. Single-family home construction continued to wither in the face of high interest rates and still-high building costs, a trend that does not appear to be disappointing any time soon. Mortgage rates remain above 6%. Even as new home sales surprised to the upside in March, bringing it to its fastest annualized pace since March 2022, continued pessimism across the board weighs heavily on the housing market ISM Purchasing Manager Indices are out on Monday and Wednesday. The upcoming ISM purchasing manager indices (PMI) give us an early look into business conditions in the second quarter, following a first quarter marked by falling sentiment, rising interest rates and flagging demand. The ISM Services index cooled in March but remained in expansionary territory, as major subcomponents (business activity, new orders and employment) continued to grow. The services sector has kept its head above water by continuing to expand the past three months, excluding a blip in December 2022. However, the lower headline level may be signaling weaknesses across the sector. Higher interest rates and tighter credit conditions are fueling worries about future demand, in line with a large drop in the new orders component in March.  

The UK budget deficit grew to GBP 139 billion in the year to March, up more than GBP 18 billion from a year earlier and the highest level on record, official data showed. However, the deficit is smaller than the GBP 152 billion forecast made by the Office for Budget Responsibility last month. Meanwhile, Lloyds Bank said that business confidence rose to its highest level in almost a year in April amid more optimism about the economy. The lender’s Business Barometer gauge of confidence rose to 33% from 32% in March, above its long-run average of 28% British healthcare and ambulance workers belonging to the GMB trade union have voted to accept a government pay offer, the union said on Friday, hours after members of another union rejected it. The offer, agreed between the government and healthcare union leaders last month, included a one-off payment equivalent to 2% of salaries in the 2022/23 financial year and a 5% pay rise for 2023/24. GMB’s backing means the offer has been accepted by four unions representing National Health Service (NHS) workers whose members include midwives, physiotherapists and ambulance worker. 

Eurozone GDP grew QoQ below expectations at 0.1 percent in the first quarter of this year. The annual GDP growth was 1.3 percent. Meanwhile, France’s GDP growth was 0.2 percent QoQ, and Germany’s unchanged at 0.0 percent. GDP increased by 0.5 percent from the previous quarter both in Italy and Spain. Core member states’ Q1 releases indicate that exports contributed positively to the GDP growth. Household consumption declined in Germany and Spain, while in France private consumption was flat. In Italy, there were positive contributions from domestic demand (gross of change in inventories) and net exports. The eurozone economy did not contract in the first quarter of 2023. The April PMI indicated a positive start for the second quarter, while there is a divergence in economic activity between manufacturing and services Annual inflation in Germany, adjusted for comparison with other European Union (EU) countries, slowed to 7.6% in April from 7.8% in March, as energy price increases eased. In France, consumer prices increased by 6.9%, an acceleration from the 6.7% uptick recorded in March. Spain’s headline inflation rate came in at 3.8%, up from 3.1% in the preceding month Economic sentiment in the eurozone held steady in April amid more optimism in the consumer and retail and services sectors, according to the European Commission. However, manufacturers were still pessimistic about production and order books. The sentiment index reached 99.3 in April versus a downwardly revised 99.2 in March Shares in Europe fell as fears that interest rate increases might tip the economy into recession intensified. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.50% lower. Major stock indexes were mixed to lower. France’s CAC 40 Index fell 1.13%, and Italy’s FTSE MIB dropped 2.41%. Germany’s DAX advanced 0.26%. 

Profits at industrial firms in China fell 21.4% from January to March from a year earlier, slightly better than the 22.9% drop recorded in the first two months of 2023, according to the National Bureau of Statistics. Despite an increase in exports and factory production, manufactured goods demand remained weak as companies struggled to recover from last year’s pandemic-induced slump. Producer deflation also persisted as factories were unable to boost prices, which further weighed on profits The People’s Bank of China extended its short-term cash injections into the banking system via seven-day reverse repurchase agreements for the 11th straight day on Friday, marking the longest streak this year. The net total injection reached RMB 637 billion for the current cycle as the central bank attempted to ensure ample liquidity at month-end China’s Politburo, the country’s top decision-making body, vowed to continue its “forceful” fiscal and monetary policy stance to support the economy as it faces obstacles in economic transformation and insufficient domestic demand, state media reported following a meeting of top officials. While China’s economy expanded at its fastest pace in a year in this year’s first quarter, policymakers remain cautious on headwinds ranging from high youth unemployment and slowing global growth. Earlier in the week, China’s cabinet, the State Council, announced measures to encourage growth in the trade sector amid weakening global demand. The reforms include consolidating the shipment of vehicles and issuing visas for overseas businesspeople Chinese stocks ended mixed ahead of a five-day holiday as Beijing reaffirmed its supportive policy stance, assuaging concerns about an uneven economic recovery. The Shanghai Stock Exchange Index rose 0.67%, while the blue chip CSI 300 pulled back 0.09% in local currency terms. China’s stock markets are closed Monday through Wednesday for the Labor Day holiday and will resume trading on Thursday.
Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, Marina Cassar Derjavets.