April 27, 2023 Reading Time: 3 minutes

Real US Gross Domestic Product (GDP) grew at an annualized rate of 1.1 percent in the first quarter of 2023, coming in within the lower half of estimates that ranged from 0.4 to 3.5 percent on Bloomberg. This is a decline from the 2.6 percent that the US economy grew in the 4th quarter of 2022. The reading, which will go through two more iterations of revision, clearly indicates that US economic growth is rapidly decelerating.

Additionally, releases of two inflation indicators showed higher-than-estimated price increases in the first quarter. The personal consumption expenditures price index grew at a 4.2 percent annualized pace between January and March 2023. Excluding food and energy, it rose 4.9 percent, the quickest in a year and higher than forecasted.

The term stagflation describes economic environments experiencing high inflation, contracting economic growth, and high unemployment simultaneously. The current US economic environment could be categorized as stagflation lite, demonstrating as it does relatively resilient employment at present amid persistently high price levels and weakening growth. 

Real US GDP chained quarterly (2018 – present)

(Source: Bloomberg Finance, LP)

Personal consumption grew 3.7 percent on an annualized basis, rising strongly from levels seen in the 4th quarter of 2022 (1.0 percent). Spending on services increased 2.3 percent, coming largely in travel, recreation, and health care, with spending on goods up 6.5 percent. 

Residential investment remains an albatross about the neck of the US economy as contractionary monetary policies have driven up mortgage rates. Falling investment in the first quarter of 2023 (-4.2 percent) brings the number of consecutive quarterly drops to eight.  

Businesses spent 7.3 percent less on equipment, consistent with recent reports of declining optimism among firm owners and slumping capital expenditure intentions. Relatedly, the biggest drag on 1st quarter 2023 US GDP was higher inventories, totaling a staggering $138 billion. Despite the burst of consumer spending, unsold products saw their starkest increase in two years, likely contributing to the growing pessimism among business owners and corporate managers. 

And finally, government spending made its biggest contribution to GDP in two years, half of which came from the Federal government. That spending was concentrated in nondefense items at the Federal level and higher compensation for government employees at the state and local level. Year-over-year government spending at the Federal level increased 3.4 percent between January and March 2023, up from 0.1 percent in the fourth quarter of 2022. State and local government spending in the first quarter of 2023 surged by 2.2 percent, up from a 1.3 percent year-over-year increase in the final quarter of 2022. 

US exports increased 7.1 percent year-over-year in the first quarter of 2023, with US imports declining 2 percent. Exports were dominated by goods, with imports concentrated in services.

During the 2022 US recession, AIER considered the possibility that stagflation was a possible (if under-considered) scenario in the coming year or two: rising inflation, slowing growth, and “a job market poised to deteriorate.”

While US employment has remained relatively strong in the interim, some cracks in the facade have begun to appear. The Federal Reserve has indicated its inclination to engage in at least one more 25-basis-point hike at its May 2023 meeting, which is likely to exacerbate the growing slack in the US economy. And with pandemic savings rapidly dwindling from household coffers, consumers may not be willing or able to provide the boost they have in coming quarters. As illustrated in AIER’s March 2023 Business Conditions Monthly, economic headwinds are intensifying. 

Peter C. Earle

Peter C. Earle

Peter C. Earle, Ph.D, is a Senior Research Fellow who joined AIER in 2018. He holds a Ph.D in Economics from l’Universite d’Angers, an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

Prior to joining AIER, Dr. Earle spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area as well as engaging in extensive consulting within the cryptocurrency and gaming sectors. His research focuses on financial markets, monetary policy, macroeconomic forecasting, and problems in economic measurement. He has been quoted by the Wall Street Journal, the Financial Times, Barron’s, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications.

Get notified of new articles from Peter C. Earle and AIER.