US: GDP risks remain tilted to the downside – UOB

Senior Economist at UOB Group Alvin Liew assesses the latest preliminary readings from the US Q1 GDP.

Key Takeaways

“The advance estimate of the 1Q 2023 GDP surprised on the downside with a 1.1% q/q SAAR expansion (versus Bloomberg est 2.0% q/q SAAR, Atlanta Fed’s GDPNow est 2.5%, UOB est 1.2%), from 2.6% in 4Q 2022. Compared to one year ago, the US GDP grew by 1.6% y/y in 1Q, from 0.9% in 4Q.”

“Private consumption expenditure added to 1Q’s growth as it rose by 3.7% (2.5ppt to headline growth) from 1.0% (0.7ppt) in 4Q but was below forecast of 4%. Net exports of goods and services also added to 1Q’s growth, but the contribution was reduced to 0.11ppt of the headline growth, down from 0.4ppt in 4Q and 2.9ppt in 3Q. The drag on US growth came from slower business spending (0.7% in 1q from 4% in 4q) and more importantly, a -2.3ppt decline in private inventories (from +1.5ppt in 4q). Fixed residential investment also continued to weigh on US growth but the pace of decline moderated to -4.2% (-0.17ppt) in 1Q from -25.1% (-1.2ppt) in 4Q, and -27.1% (-1.4ppt) in 3Q.”

“The other negative aspect of the US 1Q GDP release was that inflation remains frustratingly high. Core PCE (which excludes food and energy, and is the Federal Reserve’s preferred measure of inflation) rose at a faster 4.9% q/q in 1Q (versus Bloomberg est of 4.7% and up from 4.4% in 4Q), the highest in a year since 1Q 22 (5.6%), pointing to stubbornly high inflation while jobs market remain robust (as reflected by the latest jobless claims which eased to 230,00 from 246,000 in the previous week), implying it should keep the Fed on track for another 25bps hike in May FOMC.”

“US GDP Outlook – The 1Q GDP expansion was close to our projections, and we continue to factor in a downward shift in the US growth outlook in 2023. The main tenet to our weaker US growth projection continues to be on the combination of elevated inflation, Fed rate hikes (which we project to peak at 5.25%) and global growth slowdown. The current US banking developments adds further downside risks to growth, because any missteps could lead to more significant tightening of credit conditions, triggering a more pronounced slowdown and spillover effect to other sectors. Our base case remains the US economy will endure a mild recession of -0.5% GDP contraction in 2023 before recovering to 2.5% growth in 2024. We are paying close attention to banking sector developments as well as the US commercial and residential real estate sectors at this juncture.”