4 Prominent Economists Unpack Q1 GDP Slowdown, Discuss Implications For Fed's Rate Hikes

Despite increases in consumer spending, exports, federal government spending, state and local government spending, and nonresidential fixed investment, the U.S. gross domestic product (GDP) only grew at a 1.1% annualized pace in the first quarter of 2023, falling short of the market's expected 2% growth.

The deceleration in growth was largely due to declines in private inventory investment and residential fixed investment, highlighting the fragility of the current economic recovery.

Read more on the GDP print here.

Four prominent economists gave Benzinga their thoughts on the Q1 GDP print, each offering unique insights on what the data means for the economy and the Federal Reserve's monetary policy.

Jeffrey Roach, Chief Economist for LPL Financial, said the biggest drag on overall growth in Q1 was from a decrease in inventories as businesses prepare for weaker demand in the latter part of this year.

Roach said the U.S. economy is likely at an inflection point as consumer spending has softened in recent months, and the data is setting the Fed up for next week's meeting.

The economist said as growth and inflation slow, the Fed can transition to a pause and then perhaps an outright cut in rates by the end of the year if the economy deteriorates.

Bill Adams, Chief Economist for Comerica Bank, acknowledged that the GDP report for Q1 was slower than expected, largely because businesses are no longer rebuilding inventories like in 2022. He noted that while the boost to the economy from a mild winter has faded, the slower-than-expected GDP report will not prevent the Fed from raising rates at next Wednesday's decision.

John Leer, Morning Consult's Chief Economist, told Benzinga that while the economy eked out modest growth in the first quarter on the back of strong consumer spending, the consumer ended the quarter on a sour note, calling into question the sustainability of economic growth moving forward.

Without a robust consumer, we're likely to see more volatility and uncertainty in economic activity through the end of the year.

Joe Brusuelas, Chief Economist at RSM U.S., said the data, while firmly in the rearview mirror, illustrates that American firms are growing increasingly concerned regarding the sustainability of the current business cycle as the lagged impact of rate hikes, elevated inflation, and tighter lending which is now evident inside the real economy will all combine to finally cause the consumer to capitulate later this year.

Brusuelas agreed that the slightly cooler-than-expected GDP report will not prevent the Fed from executing another quarter percentage point rate hike at its decision next Wednesday.

The overall takeaway from the comments is that while Q1 GDP growth was slower than expected, the economy is still expanding, largely due to strong consumer spending.

However, there are growing concerns about the sustainability of the current business cycle and the potential for the consumer to pull back later this year.

The Fed will likely take these factors into consideration as central bank officials make their decision on interest rates, with a 25-basis point increase expected.

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