United States Economic Forecast

The economy clocked a 1.1% quarter-on-quarter annualized expansion in Q1, in line with our Consensus. Underlying momentum was stronger than the headline figure suggested, however, as a decrease in private inventories subtracted 2.3 percentage points from growth. In particular, household consumption accelerated in the quarter, buoyed by falling inflation, robust employment growth and warm weather. Moreover, government spending growth picked up, and the contraction in fixed investment eased. Exports rebounded, although a concurrent rise in imports saw the external sector’s contribution to GDP shrink. While PMI data suggests an upbeat start to Q2, our panelists expect slowing momentum over the quarter as a whole, in line with a higher federal funds rate and tougher credit conditions in the wake of March’s bank failures.

Inflation dropped to 5.0% in March from February’s 6.0% on a fall in energy prices and slower growth in food prices. March’s reading was the weakest since April 2021 but still more than double the Federal Reserve’s 2.0% target. Moreover, core inflation ticked up in March. Inflation should continue to decline later this year but will stay above the Fed’s target in 2023.