US: Don't be surprised if real GDP growth in Q1 turns out to be negative – Wells Fargo

On Thursday, the first estimate of US GDP growth will be released. Analysts at Wells Fargo, expect a 0.6% annualized growth rate. They point out that although the economy does not appear on the cusp of another downturn, the probability of a recession next year is not insignificant. 

Key Quotes: 

“We are not formally changing our projection of 0.6% annualized GDP growth rate in Q1-2022, but the risks to that estimate appear to be skewed to the downside. In short, we would not be surprised if the advance estimate of Q1 GDP growth, which the Bureau of Economic Analysis (BEA) is scheduled to release on Thursday morning April 28, turns out to be slightly negative.”

“A negative print in GDP growth in the first quarter, should it actually happen, would likely be due to two volatile components in the national income and product accounts: net exports and inventories. The underlying growth momentum in the economy appears to have remained reasonably solid in the first quarter. We estimate that real personal consumption expenditures (PCE), which account for roughly two-thirds of total spending in the economy, grew at an annualized pace of about 3% in Q1.”

“Furthermore, the jump in inflation has caused the Federal Reserve to turn hawkish. As we wrote in a recent report, we look for the Federal Open Market Committee to raise its target range for the fed funds rate by 50 bps at its meeting on May 4. We also expect that the FOMC will hike by another 50 bps at its meeting in June and by an additional 100 bps by the end of the year. We also expect the Fed to start shrinking its balance sheet, which will act as a form of additional monetary tightening. The combination of declining real disposable income and monetary tightening could potentially cause the economy to lose enough momentum that it slips into recession in 2023.”