Things aren’t panning out as the economists predicted. A new report shows that the quarterly gross domestic product (GDP) growth was lower than economists expected.
GDP is a measure of all goods and services produced for a period.
During the first three months of 2023, growth was slower as interest rate increases and inflation impacted the economy. The GDP rose at a 1.1 percent annualized pace in the first quarter, the Commerce Department reported on April 27. Economists surveyed by Dow Jones had been expecting growth of 2 percent, CNBC reported. The lower-than-expected growth rate followed a fourth quarter in which GDP climbed 2.6 percent, part of a year that saw a 2.1 percent increase.
According to the report, the personal consumption expenditures (PCE) price index, an inflation measure that the Federal Reserve follows closely, increased by 4.2 percent. This was actually higher than the 3.7 percent estimate. Forgoing food and energy, core PCE increased 4.9 percent, compared to the previous boost of 4.4 percent.
“People were still spending even despite higher prices, even despite higher inflation and a big drag that we had from inventories,” Citigroup economist Veronica Clark told CNBC. “Overall, I think it’s a relatively inflationary report, even though the headline GDP number is a bit softer. All of those signs that demand is still strong and prices are still rising were very much present today.”
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The lower growth was a result of a drop in private inventory investment and a decrease in nonresidential fixed investment, the report revealed.
In the first quarter an acceleration in consumer spending was counteracted by businesses liquidating their inventories as they anticipated weaker demand later this year amid higher borrowing costs.
“Leaner inventories mean second-quarter GDP is on a solid foundation,” Chris Low, chief economist at FHN Financial in New York, told Reuters. “Of course, what is built on that foundation depends on many things, including job and income growth as well as confidence and credit availability.”
This is the first decline in private inventories in 1-1/2 years reported by the Commerce Department in its snapshot of first-quarter gross domestic product. Private inventory investment decreased at a $1.6 billion pace, the first drop since the third quarter of 2021. The dip was led by wholesalers and manufacturers and followed a $136.5 billion rate of increase in the fourth quarter.
“The handoff to second-quarter spending is soft and the outlook for the consumer over the rest of 2023 is murky,” Michael Gapen, chief U.S. economist at Bank of America Securities in New York, told Reuters.
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