U.S. GDP for the first quarter of the year is due out tomorrow and, in some ways, the stakes couldn’t be higher. With the Federal Reserve’s May rate hike decision just around the corner, tomorrow’s GDP report could be the make-or-break economic data release that affects the central bank’s monetary trajectory this year.
So, what do you need to know about the April 27 GDP release?
Well, recession is the name of the game heading into tomorrow’s production figures. Indeed, after nine rate hikes so far this cycle — representing the fastest rate of tightening in decades — economists and analysts everywhere have the notion of a Fed-induced economic decline fresh on their minds.
In that regard, things are looking relatively promising. According to Bloomberg, Q1 U.S. GDP is projected to come in at a 2% annualized rate. This is expected to be largely fueled by elevated personal spending. In fact, some believe Q1 2023 may mark the strongest quarter for consumer spending since 2021.
The Atlanta Fed’s GDPNow tool projects a 2.5% economic growth in Q1, driven by a 2.84% increase in consumer spending. This is one of the most optimistic estimates for the country’s upcoming report card.
In addition, the survey-based Composite Purchasing Managers Index (PMI), a sort of faux GDP gauge, has recently improved. That suggests a lower chance of a recession than previously indicated.
Chris Williamson, Chief Business Economist at S&P Global, recently said:
“The latest survey adds to signs that business activity has regained growth momentum after contracting over the seven months to January. The latest reading [for April] is indicative of GDP growing at an annualized rate of just over 2%.”
What Does Thursday’s U.S. GDP Report Mean for the Fed’s Rate Hike Decision?
Perhaps the single-most-important lens with which to view tomorrow’s production data is the implication for the Fed’s May rate hike decision. Indeed, the central bank has been on something of a rampage over the past year or so, raising rates time and time again. With the federal funds rate currently hovering between 4.75% and 5%, most economists expect the central bank to raise rates at least one more time before stepping off the gas.
Fed Chair Jerome Powell has repeatedly warned of “some pain” ahead in propping up expectations for an impending downturn. Tomorrow’s GDP numbers will likely verify whether economists will have to continue to wait for the economy to fully digest the Fed’s quantitative tightening (QT) efforts, or if the long-prophesied economic slowdown is closer than previously thought. Depending on the results, the Fed may even opt to not raise rates at its early May Federal Open Market Committee (FOMC) meeting off the back of an underwhelming economic growth benchmark.
Tomorrow’s GDP numbers will likely also inform other important economic indicators this week, including the Fed-preferred inflation gauge — the Personal Consumption Expenditures (PCE) report — as well as the Employment Cost Index (ECI) both due Friday.
The ECI holds particular importance to economists. The metric measures wage growth while taking into account benefits as well as salaries, unperturbed by changes of employment within particular occupations or industries. The wage measure is expected to have increased 1.1% in Q1 2023, a minor improvement from Q4 2022.
“The ECI release is really key for the Fed in terms of understanding how the feedback loop is from employment back to inflation more generally,” said Shannon Seery, Economist at Wells Fargo.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
