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Key Points for the Week

  • Sentiment is weak but consumers are spending.
  • GDP growth was just 1.1% in the first quarter, but that masks some underlying strength.
  • Changes in inventories, which are usually volatile, pulled GDP down significantly.
  • Real demand rose 3.2% in the first quarter, the fastest pace of growth in almost two years.
  • Demand was powered by consumption and rising incomes.

Economic Update

Despite more than a year of aggressive Federal Reserve rate increases, the United States economy is still growing, albeit more slowly. U.S. gross domestic product (GDP) – the value of all goods and services produced in the U.S. economy – grew by 5.1 percent over the first quarter.

Over the first quarter of 2023, real GDP increased by 1.1 percent over the first quarter. In economics, “real” means the value of something after inflation (inflation is the rate at which prices are increasing). For example:

  • A real return on an investment is the return after inflation has been subtracted. So, if an investment earns 7 percent and inflation is 4 percent, the real return in 3 percent.
  • Real growth in personal income is income after changes in the cost of goods and services are considered. For example, if personal income increases by 5 percent, from $50,000 to $52,500, and inflation is 4 percent, the real increase in income is 1 percent.
  • In the first quarter, real GDP was lower than GDP because real GDP reflects price changes – and prices have been moving higher.

Last week, the Personal Consumption Expenditures (PCE) Index, which is one of the Federal Reserve’s preferred measures of price increases, showed that inflation has continued to trend lower.

  • Headline inflation was 4.2 percent in March, year-over-year, down from February when it was 5.1 percent.
  • Core inflation, which excludes food and energy prices, was up 4.6 percent, year-over-year, down slightly from February when it was 4.7 percent. However, month-over-month, core inflation remained unchanged.

Inflation and Fed rate hikes have had less impact on company earnings than analysts anticipated. To date, 53 percent of companies in the Standard & Poor’s 500 Index have reported results for the first quarter and almost 8 of 10 have reported that earnings per share was higher than expected. Overall, S&P 500 earnings are expected to dip in the first quarter before increasing later in 2023, reported John Butters of FactSet.

Last week, major U.S. stock indices finished the week higher, according to Nicholas Jasinski of Barron’s. Yields on U.S. Treasury notes and bonds moved lower last week.

This Week in the Markets

Equities closed out April in strong form amid better-than-expected earnings and resilient economic data. The S&P 500 posted a gain of 1.6%, pushing its year-to-date gains to 9.2%. Not a bad way to start the first four months of the year, despite all the recession calls and the banking crisis of March.

However, sentiment remains bearish. Also, May presents one of the most well-known investment axioms: “Sell in May and go away.” This gets a ton of play in the media, as the next six months are indeed the worst-performing period of the year. Plus, stocks did quite poorly last year during this timeframe, which only adds to the hype.

The thinking is investors are better off ignoring these six months. The S&P 500 is typically weak May through October, up only 1.7% on average and higher less than 65% of the time, making it indeed the worst investing period on average.

Gross Domestic Product (GDP)

The Bureau of Economic Analysis reported that the U.S. economy expanded by only 1.1% in the first quarter. That’s an annualized rate — the actual quarter-over-quarter increase is just under 0.3%. This was well below expectations for 1.9% growth.

GDP can be broken down into the following components:

  • Personal consumption (68%)
  • Business investment (13%)
  • Residential investment, i.e., housing (4%)
  • Government spending and investment (18%)
  • Net exports, i.e., exports minus imports (-3%)
  • Change in private inventories

The last two components are extremely volatile and can create significant swings in the headline data. Note that net exports are -3% of GDP because the U.S. exports less than it imports, and so net exports is negative.

There Was No “Slowdown”

Domestic demand rose by 3.2% in the first quarter. That’s the fastest pace of growth since the second quarter of 2021. The average over the last decade (2010 – 2019) was 2.3%.

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Domestic demand wasn’t boosted only by government spending, although this sector should not be ignored as it makes up close to a fifth of the economy.

Private sector demand rose 2.9% in the first quarter, which is the fastest pace since the second quarter of 2021.

Consumers Are Powering the Economy

Domestic demand was boosted by personal consumption, which surged at a 3.7% pace. Much of this came from a rebound in goods consumption, mostly thanks to more vehicle purchases. But even services spending, which makes up 45% of the economy, rose 2.3%.

For perspective on the consumption numbers from the first quarter, the pace of growth was a lot faster than the 2.3% average experienced during the last decade and the fastest since the second quarter of 2021. However, consumption in 2021 was boosted by stimulus checks.

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What’s driving strong consumption now?

  • Strong employment
  • Lower inflation, especially gas and food prices, which is boosting real incomes, i.e., incomes adjusted for inflation

What Next?

All the above data is for the first quarter, and we’re already a month into the second. It’s hard to imagine consumption and domestic demand growing at the torrid pace of the first quarter. However, for those predicting a recession it might be difficult to identify what could lead to a crash in employment or higher inflation going forward.

The latest employment news is positive. Initial claims for unemployment benefits dropped last week, from 246,000 to 230,000. This means fewer workers were laid off and filing for benefits. Even continuing claims, which represents the total number of people continuing to receive unemployment benefits, were unchanged at about 1.86 million.

Beyond the numbers, what matters is the trend, and there has not been a pickup in initial or continuing claims. In fact, the current levels are in line with those seen prior to the pandemic when employment was strong. Of course, with job growth already hitting 1 million plus in the first quarter, and the unemployment rate close to 50-plus-year lows, the labor market looks strong.

Another potential positive going forward: housing. Residential investment has dragged on GDP growth for eight straight quarters. There may be some relief coming from this sector, which would be positive for the economy.


Inflation is proving to be entrenched, and many have pointed to the tight labor market as the reason prices continue to rise. While labor costs are an important factor, there are other issues at play, too.

When the national news reports on a shock – the war in Ukraine affecting food supplies, the pandemic affecting supply chains, bird flu producing an egg shortage, or a dairy farm explosion affecting the price of milk – companies may take the opportunity to raise prices because customers are less likely to complain about the increase, reported Tracy Alloway and Joe Weisenthal of Bloomberg.

Companies in an industry, such as soft drink makers or chicken wing restaurants, may raise prices in tandem, giving consumers little choice but to pay the higher price. When the shock is resolved and wholesale prices move lower, companies often don’t lower retail prices. Instead, they simply keep prices high.

Isabella Weber and Evan Wasner at UMass Amherst listened to earnings calls, compiled data on companies, and reviewed literature about corporate price-setting. Their research paper reported that overlapping emergencies in recent years have allowed companies to increase prices and profits. They dubbed the phenomenon “sellers’ inflation.”

Sellers’ inflation is not possible in a perfectly competitive economy, but in a highly concentrated economy in which large firms are price makers, it is a real possibility – as we are witnessing again today.

Isabella Weber and Evan Wasner, UMass Amherst

Sellers’ inflation may be another reason inflation has been sticky.

In theory, a recession and falling consumer demand should cause companies to lower prices. However, as Weber and Wasner pointed out, recessions have the potential to hurt smaller businesses, if they have difficulty finding funding, and increase the power of larger ones.

Did you Know? This Week in History

May 5, 1961: Alan Shepard Becomes the First American in Space

On May 5, 1961, Navy Commander Alan Bartlett Shepard Jr. was launched into space aboard the Freedom 7 space capsule, becoming the first American astronaut to travel into space. The suborbital flight, which lasted 15 minutes and reached a height of 116 miles into the atmosphere, was a major triumph for the National Aeronautics and Space Administration (NASA).

In the late 1950s and early 1960s, the United States and Soviet Union raced to become the first country to put a man in space and return him to Earth. On April 12, 1961, the Soviet space program won the race when cosmonaut Yuri Gagarin was launched into space, put in orbit around the planet, and safely returned to Earth. One month later, Shepard’s suborbital flight restored faith in the U.S. space program.

NASA continued to trail the Soviets closely until the late 1960s and the successes of the Apollo lunar program. In July 1969, the Americans took a giant leap forward with Apollo 11, a three-stage spacecraft that took U.S. astronauts to the surface of the moon and returned them to Earth. On February 5, 1971, Alan Shepard, the first American in space, became the fifth astronaut to walk on the moon as part of the Apollo 14 lunar landing mission.

Weekly Focus

Character is like a tree and reputation like a shadow. The shadow is what we think of it; the tree is the real thing.

Abraham Lincoln, Former U.S. President

Life is what happens when you’re busy making other plans.

John Lennon, Musician