US economic data sent mixed signals throughout the first quarter of 2023. These mixed signals suggest that the US economy is at a turning point, coming out of a year of robust, but unsustainable, growth in 2022 and heading into a slowdown. Although downside risks persist, this will feel more like a business-cycle slowdown than a typical recession, followed by a modest recovery in 2024.
Early signs of consumer strain are appearing
For now, consumer spending remains the strong point of the US economy. However, this will slow more noticeably in the second quarter and contract slightly in the third as prices remain high and the full weight of monetary tightening over the last year comes to bear. The report highlights several economic indicators that are starting to weaken—including the savings rate, credit-card balances and loan delinquencies—suggesting that this consumer-led slowdown may be on the way.
What does this mean for economic growth?
Real private consumption surged by 3.7% quarter on quarter (annualised) in the first quarter of 2023. This helped to support real GDP growth of 1.1% in the first quarter, despite a steep decline in private inventories. However, even this story was mixed.
Strong consumption growth in the first quarter was really a January story. A jump in real incomes at the start of 2023, together with still-low unemployment, helped to drive consumer spending. This had already started to taper off in February and March, and we do not expect this pace of growth to continue into the second quarter.”
Cailin birch, global economist and lead US analyst, EIU
Manufacturing indices have been softening for several months, although the impact of this on overall GDP has thus far been offset by continued consumer demand. The two sectors will likely turn down in tandem in the coming months.
The Fed has reached the end of its tightening cycle
Previously expectations were for the Fed to raise interest rates a final time in June 2023. However, the failure of a third mid-size US bank in May and the looming debt-ceiling deadline in June mean that the Fed is likely to pause its tightening cycle for now.
EIU’s “US economic slowdown” report is available free of charge here.
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