Milton Ezrati

First Quarter GDP: Weakness

As bad as the first quarter looks, the details tell of worse

ECONO miC aC tivit Y in the first quarter disappointed. Real gross domestic product (GDP) grew at a paltry 1.1 percent annual pace between January and March.

That was better news than a zeroto-negative figure that would have indicated recession but a poor showing nonetheless. The details behind this overall measure painted an even less attractive picture, suggesting that recession in coming months and quarters is more likely than not.

Worries about the economy’s underlying strength first emerged this time last year when the Commerce Department reported a 1.6 percent decline in real GDP. When the second quarter report showed another drop of 0.6 percent, many in the business and financial communities declared that the economy was in recession. The White House objected to this assessment.

Debate on the matter only died down when the third-quarter report showed a reasonably strong 3.2 percent annual real growth rate, and the fourth quarter showed a weak but decisively positive 2.6 percent growth rate. Now, the first quarter’s weakness will likely reignite the debate. It should. The picture is of a troubled economy.

The Commerce Department’s report for this first quarter of 2023 identified only two sources of strength—and even they are suspect. One is the American consumer. On the surface, things here look good. After a slow 1.0 percent annual growth rate during last year’s fourth quarter, overall consumer spending accelerated to a 3.7 percent pace of expansion during the January–March period. All the surge, however, occurred in durable goods sales, particularly autos.

Alone, sales of autos and parts accounted for almost half the overall GDP growth for the quarter. Because auto sales have trailed during the entire post-COVID recovery, surges of this kind are more likely a sign of catchup than a reason to expect future gains. What is more, inflation tends to support short-lived surges in sales of durable goods, such as autos, as people buy quickly to beat future price increases rather than save for a future purchase and lose the real buying power of the money in the interim. For obvious reasons, such behavior, though rational, has limited staying power. declines. Housing fell at a 4.2 percent annual rate during the quarter, and business purchases of productive equipment fell at a 7.3 percent rate. The first is hardly a surprise. For months, residential construction and sales figures have given evidence of the housing slump. Weakness in housing always translates in time to weak sales in appliances and household goods generally. The drop in equipment sales signals a fall in business confidence that can only slow the pace of future economic activity.

Net exports were another seeming source of strength. The Commerce Department reports that real exports of goods and services rose at a 4.8 percent annual rate during the quarter just passed, while imports rose at only a 2.9 percent rate. The difference added to measures of overall production and growth. But the difference also suggests that the domestic U.S. economy is growing at a less robust rate than the rest of the world. Many products sold in this country—both to consumers and businesses—are imported or contain imported parts. Slack in the pace of imports growth betokens slow sales generally.

It is noteworthy in this respect that the sales strength otherwise occurred in autos, since most cars sold in this country—whether an American or a foreign brand—are manufactured domestically and so tend not to raise measures of imports. In other words, the low import growth figure reflects generally slow spending growth.

Most worrisome are two sharp

What is more, since innovations are usually built into machinery, slack equipment purchases point to slower productivity growth in coming months and quarters. Also indicating slack future productivity growth is the deceleration in purchases of technology and systems, what the Commerce Department refers to as “intellectual property products.” These increased at only a 3.8 percent annual rate, barely more than half the pace of earlier quarters.

To be sure, drawdowns in business inventories did disproportionately detract from growth during the first quarter. Rebuilding these inventories will undoubtedly improve the overall look of this spring’s quarter when reported in July. But these inventory gyrations say little about the underlying strength or weakness in the economy. If anything, any catchup in the coming quarters will be muted. Because high and rising interest rates have made retailers and wholesalers keen to keep inventory stocks lean, they are less likely to rebuild inventory stocks as actively as they otherwise might.

On balance, this first quarter GDP report offers little to no encouragement. If, for the time being, reason remains to reject the recession designation, the signs—and the Federal Reserve’s continued rate hikes—point in that direction by the second half.