Why the talk of a recession when predictions are for first quarter GDP growth as high as +3.2 percent?
After fourth quarter 2022 GDP growth came in at 2.6 percent in the government’s final estimate (see graph), economists are now predicting higher 2023 growth, despite talk the Fed may raise their fed funds rate another +0.25 percent.
Why? Firstly, the banking crisis is lowering the odds of any ‘hard’ landing this year caused by the Fed, because pushing interest rates any higher could cause more banks to fail that have loaded up with either Treasury or Mortgage-backed securities that lost value when rates rose.
And real consumer spending surged 1.5 percent in January, which makes up 70 percent of GDP growth (see below graph). Personal income (blue bar) has been exceeding outlays (orange bar) since last November, so personal savings have increased, meaning consumers can continue to spend.
Even if real consumer spending remained soft in March, that would not change its sharp upward trajectory for the first quarter, economists said. JPMorgan raised its first-quarter GDP growth estimate to a 3.25 percent rate from a 2.5 percent pace. Goldman Sachs bumped up its estimate by 0.2 percentage points to 2.4 percent.
There was some good news on inflation as well, as the Fed’s preferred inflation statistic, the Personal Consumption Expenditures Index (PCE), slipped from 5.3 to 5.0 percent in February, its core rate without food and energy prices falling from 4.7 to 4.6 percent.
It isn’t just interest rates that control growth, but consumers’ confidence in their jobs and future prospects. Both the Conference Board and University of Michigan surveys remain slightly positive in their outlook.
“Driven by an uptick in expectations, consumer confidence improved somewhat in March, but remains below the average level seen in 2022 (104.5). The gain reflects an improved outlook for consumers under 55 years of age and for households earning $50,000 and over,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board.
The University of Michigan’s survey was slightly less sanguine. “Consumer sentiment fell for the first time in four months, dropping about 8% below February but remaining 4% above a year ago,” said survey director Joanne Hsu. “This month’s turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank.”
Other inflation indicators are showing similar declines, so there is hope the inflation scare that has affected confidence in our banking system may soon be over. And once again, the necessity of supporting our banking system should help wage earners, since it will trump any desire by the Fed to harm wage earners by pushing interest rates even higher.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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