The Week In Review: April 23 – April 29

The first reading of first-quarter gross domestic product (GDP) was released last week, coming in lower than the forecasted 2.0% at 1.1%. The mild winter in most of the U.S. led to a temporary surge in consumer spending in January, and new auto sales were also robust in the first quarter. There was also a record-high Social Security cost-of-living adjustment and seasonal adjustment issues due to the timing of COVID stimulus payments in 2020-21.

All of this was overwhelmed by slower spending and declining confidence from the consumer, and it appears the Federal Reserve’s rate increases are finally making an impact. Inflation was hammering the consumer, and the Fed aggressively moved to address it by raising rates. Savings levels, which had ballooned during the pandemic, were depleted by inflation and higher prices, and consumers had to resort to credit to keep up with their spending habits. Higher interest rates have made borrowing much more expensive, and all those people who ran up their credit card balances to record highs are paying more to service that debt.

Is it any wonder, then, that it appears consumers are choosing to spend less to try to get those balances under control? Or that their lack of ability to continue to consume is causing their confidence to decline? Their optimism seems to be fading. We’ve said before that once the consumer cracked, the economy would be in trouble — and it appears we are nearing that stage.

The same can be said of the stock market and company earnings. Earnings have been mixed, but higher rates clearly impacted the bottom lines of many companies. (See more on earnings below.) Layoffs are becoming more frequent, and higher interest rates have created havoc in the banking sector. All this could be creating a brew of uncertainty and clearly has an impact on the psyche of the consumer, investor and average citizen who feels the economy is on the wrong track. As a result, it’s not surprising that the stock markets seem nervous and rangebound.

The 1.1% GDP growth would likely have been even lower if the winter had been harsher and a lot of the one-offs mentioned above hadn’t materialized. But even with those one-time bumps, 1.1% growth is pretty anemic, especially compared to +3.2% and +2.6% in the third and fourth quarters of 2022, respectively. We likely won’t see an improvement next quarter, and if we see negative growth for Q2, we are halfway to the official definition of recession.

What is needed to get back on track? I believe the Fed needs to stop raising rates. It’s not a magic solution; if the Fed stops raising rates, things won’t automatically revert back to all good or normal. We need to get government spending in line, and the consumer needs to get healthy again before that can happen. But if the Fed stops raising rates, it will go a long way to not making things worse. Then the economy can start to recover, and we can begin to usher in higher growth, more optimism and better times ahead.