U.S. GDP Grows Modestly in last quarter, Employment Slows but Remains Robust
Consumer Price Inflation Elevated but Slowing, Banking Sector Stress Eases
In the first quarter of 2023, the U.S. economy experienced modest real GDP growth, driven by an increase in personal consumption expenditures (PCE), according to the most recent Federal Open Market Committee (FOMC) meeting minutes released Wednesday. Employment gains slowed but remained robust, with the unemployment rate ticking down to 3.5 percent. Meanwhile, consumer price inflation continued to be elevated but showed signs of slowing, according to information from the May 2-3 meeting.
U.S. Economic Outlook
The first quarter saw a modest growth in real GDP, largely fueled by a surge in PCE. Consumer spending picked up throughout the quarter, with a significant spike in January followed by a slight net decline in February and March. Notably, light motor vehicle sales saw a marked increase in April.
Business fixed investment slowed further, with new orders for nondefense capital goods excluding aircraft continuing to decline in March, signaling a potential weakness in capital goods shipments in the near term. Residential investment also declined, albeit at a slower pace than last year. Meanwhile, net exports made a small positive contribution to GDP growth as exports rebounded more strongly than imports from their fourth-quarter declines.
However, U.S. manufacturing output fell in March, with national and regional indexes for new orders indicating a potential further softening in factory output in the coming months.
Labor Market Conditions
Despite a slowdown in the pace of increases, total nonfarm payroll employment remained robust in March. The unemployment rate edged down to 3.5 percent, with the rate for African Americans falling to 5.0 percent and the rate for Hispanics dropping to 4.6 percent. Aggregate measures of the labor force participation rate and the employment-to-population ratio both edged up. However, the private-sector job openings rate, as measured by the Job Openings and Labor Turnover Survey, moved down significantly during February and March but remained high.
Recent measures of nominal wage growth have eased from their peaks last year but are still elevated. Over the 12 months ending in March, average hourly earnings for all employees rose 4.2 percent, down from a peak of 5.9 percent a year earlier. The employment cost index for private-sector workers increased 4.8 percent over the year ending in March, down from its peak of 5.5 percent in June of the previous year.
Inflation Trends
Consumer price inflation remained elevated in March but continued to slow. Total PCE price inflation was 4.2 percent over the 12 months ending in March, and core PCE price inflation was 4.6 percent. The trimmed mean measure of 12-month PCE price inflation, constructed by the Federal Reserve Bank of Dallas, stood at 4.7 percent in March. Survey-based measures of longer-term inflation expectations remained within their recent ranges, with near-term measures moving up but still below their peaks seen last year.
Global Economic Activity
Foreign economic activity rebounded in the first quarter, with China's economy reopening after COVID-19 shutdowns, a pickup in the economies of Canada and Mexico, and Europe's economy showing resilience against the energy price shock from Russia's war on Ukraine. However, economic growth elsewhere in emerging Asia was weak, largely due to a pronounced tech-cycle slowdown.
Oil prices edged down amid concerns about the global economic outlook. Retail energy inflation slowed, contributing to a decrease in headline consumer price inflation in many advanced foreign economies. Core inflation eased in some foreign economies but remained persistently elevated amid tight labor markets.
Financial Situation Review
Market sentiment improved over the intermeeting period as stress in the banking sector declined. The market-implied path for the federal funds rate in 2023 increased modestly. Broad equity price indexes increased, although equity prices of some regional banks declined. Financing conditions remained restrictive, with borrowing costs still elevated. Risk sentiment in foreign financial markets also improved, with moderate increases in broad equity indexes and declines in option-implied measures of equity volatility.
