Recession? Just a slowdown?
The US economy lost momentum in the first quarter. The question is how bad will it get.
The United States economy cooled in the first quarter, growing at an annualized pace of only 1.1%. That was below most consensus forecasts and a sharp deceleration from the 2.2% growth rate in the fourth quarter of 2022.
So why are stocks rallying Thursday? Strong earnings from Facebnook/Instagram owner Meta Platforms certainly helped. Shares of the house that Zuck built surged 14%, hitting a new 52-week high in the process. But dig deeper in the GDP report and you can see why investors might be shrugging off the economic malaise.
Consumers are still spending. The personal consumption expenditures price index rose 4.2%, more than expected. Income and savings are increasing as well, another sign that the American consumer remains in relatively healthy shape.
The main reasons for the anemic GDP growth were a decline in the level of private inventory investments and a slump in new home construction. In other words, businesses are nervous about the future…and there are still questions about what the spike in mortgage rates thanks in part to the Federal Reserve’s interest rate hikes and resulting jump in long-term bond yields will do to the housing market.
The concerns about corporate spending are legitimate. Shares of construction equipment giant Caterpillar fell about 5% Thursday despite strong earnings and revenue. That’s because investors were focusing on an increase in dealer inventories and a flat backlog. This suggests that the company may have difficulty with future sales and order demand.
For now, the economy is still chugging along at a healthy enough clip to keep fears of a serious recession at bay. But with the Fed expected to raise interest rates one more time next week, Wall Street, Corporate America and average consumers clearly need to prepare for a further slowdown.