The U.S. economy grew at an annual rate of 1.1% in the first quarter of 2023 which was slower than expected, reflecting lower business investment in new plant, equipment and inventories. Stock markets responded positively to this news and closed up for the week.
- Q1 GDP growth at 1.1% was down from 2.6% (annualized rate) in 2022-Q4 and from 3.2% in Q3 signaling that the Fed’s actions to tame inflation by slowing economic growth are working.
- The ongoing struggles at First Republic Bank have renewed fears about instability in the banking sector and how the impact of tighter credit conditions will create pressure for slower consumer spending and business investment.
Last week’s news on inflation won’t change the Fed’s likely decision to raise its policy rate by 25 basis points at its meetings May 2-3, bringing the Fed funds target rate to 5.00% – 5.25%.
- Core PCE inflation for March increased at an annual rate of 4.6% which is down only slightly from 4.7% in February. The Employment Cost Index shows private wages increasing 5% (annual rate) in March, also only slightly less than reported in February.
- Although the month/month rate of U.S. rent growth is slowing, March rents still are up 9% over last year, the highest since 1981. With shelter being 40% of the CPI, year/year high rental rate increases have been a major impediment to getting core inflation down more quickly.
- The Fed’s meeting announcement of its rate increase on Wednesday is also expected to mention the possibility of more tightening. Stronger than expected inflation and employment data for April and May likely would trigger another 25 basis point rate increase in June. More likely, however, the Fed will pause its rate increases after this week absent an upside surprise in inflation, jobs and wages.
First quarter S&P 500 company earnings are more positive than previously expected, and forward revisions are moving up not down.
- Of the S&P 500 companies already reporting, 81% have beat lower earnings-per-share (EPS) estimates, coming in flat on a year over year basis.
Disclosure: Securities offered through Keel Point Capital, LLC, Member FINRA and SPIC. Brokerage and Investment Advisory Services are offered under the Keel Point brand. Investment Advisory Services offered by Keel Point, LLC, an affiliate of Keel Point Capital, LLC. While reasonable efforts have been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Keel Point does not give tax, accounting, regulatory, or legal advice to its clients.