Economic growth likely was solid to start the year, but that could end the good news for a while
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The U.S. economy likely grew at a solid pace to start the year, though things are likely to get worse before they get better. First-quarter gross domestic product is projected to show an annualized gain of 2% when the Commerce Department releases the number Thursday morning. That will represent a deceleration from the fourth quarter’s 2.6% increase and it could be the peak for a year that may well end in recession. In fact, Moody’s Analytics chief economist Mark Zandi said he is expecting a 2.1% increase, slightly ahead of consensus, before the economy takes a turn down. “That’s right on the economy’s potential,” Zandi said. “It shows an economy that so far is resilient, weathering all kinds of storms so far and growing at pretty close to potential. I expect much slower growth ahead.” Economists fear twin threats to growth: A Federal Reserve that continues to raise interest rates in its quest to stomp out inflation, and a banking crisis that is at least a tangential byproduct of the monetary policy tightening. The fear is that as credit gets tighter through the year, businesses will pull back investment, consumers will dial back spending and unemployment will rise enough to tip the U.S. into contraction. Where the growth is So far, consumers have managed to withstand the higher rates. Spending has remained fairly strong, though credit card debt has soared more than 20% over the past year, according to Moody’s Investors Service. Markets will be parsing Thursday’s release to see where the pockets of strength are and how durable they appear. “We expect a solid 2.3% (QoQ SAAR) increase in Q1 real GDP, with details that appear even more positive for the economic backdrop. Most notably, there should be a substantial boost from household consumption, which we expect to rise 5.0%,” Citigroup economist Veronica Clark said in a client note. Goldman Sachs also said this week it is tracking 2.3% quarterly growth. On the other side, the Atlanta Fed’s GDPNow tracker is pointing to growth of just 1.1%. Importantly, Clark also noted a “still-solid trend of consumption (especially for services) that is likely to persist until the labor market weakens more materially.” What makes that critical is that consumer spending accounted for 68% of total GDP in the fourth quarter and is thus the linchpin for growth. Despite rising debt levels and the prospects that financing will become more difficult to come by, consumers are in fairly solid shape. Total consumer debt rose 6.2% in 2022 after climbing 7.4% the previous year, according to Federal Reserve data . Debt service as a share of disposable income is at 9.7% , the highest since the Covid pandemic hit in the first quarter of 2020, but is essentially in-line with the past decade or so. The shape of the $148 trillion household balance sheet is one of the key reasons most experts expect any recession to be short and shallow. “The base-case scenario as you look forward from here is this is more of a traditional recession, not a balance-sheet recession,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Household leverage is really not problematic at this point.” Recession probability rises Still, markets are pricing in a strong chance of recession, however mild. The inversion between 3-month and 10-year Treasury yields, the Fed’s favorite recession indicator, continues to widen and is well into the area associated with past contractions. At the end of March, the inversion was 115 basis points, which the New York Fed said equated to a 58% chance of recession. The spread has since widened to 169 basis points. Other under-the-radar indicators also point to trouble. In the trucking industry, spot load posts on the DAT Freight & Analytics site are down 68.3% from a year ago. Spot load posts are where companies that don’t have contracts look for trucks to deliver their products. The measure reflects both a decline in demand as well as receding inflation pressures that at least should give the Fed some comfort that its tightening measures are having an impact, But the signs also point to an economy that at the very least has a tough slog ahead. “I’d be surprised if we don’t see growth closer to 1% [for the rest of the year], barely positive and job growth coming to a virtual standstill and unemployment ticking higher,” said Zandi, the Moody’s economist. “At least so far, the economy is holding up surprisingly well.”
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