First-quarter GDP growth expected to be decent against lousy economic backdrop

The new year got going with a bang. Instead of the economic gloom many had forecast, American companies kept hiring and consumers kept spending. Investors will see evidence of that strength when the first quarter Gross Domestic Product report is released on Thursday.

A forecasting model from the Federal Reserve Bank of Atlanta predicts the economy grew at a 2.5% annual rate during the first three months of 2023. That’s decent data. Three months ago, this same forecast was looking for the economy to expand by less than 1%.

The numbers released Thursday will be the first of three versions as government statisticians revise the figures in the months ahead. Still, a 2.5% annual growth rate in the first quarter almost matches the economic output at the end of 2022.

Don’t be lulled into a state of complacency, though. Headwinds have been gathering strength. Hiring, while still strong, has been slowing. Inflation, while cooling, remains uncomfortably high. Demand for services, while still growing, is falling, especially new demand. Mortgage rates have stabilized, but are 33% more expensive for buyers than a year ago hurting housing. Retail sales softened in March. And gas prices are rising again, zapping consumer spending.

This is what a slowing economy produces.

Consumer debt is at record highs. The pandemic credit card paydown has ended. Credit card interest rates are at record highs of almost 21%. New mortgage applications remain near seven-year lows. And banks are tightening lending standards.

Less credit and more expensive credit show a slowing economy.

There is no doubt the American economy has proven resilient against high inflation and higher interest rates intended to address inflation. For months, the bond market has been signaling a recession with an inverted yield curve, when shorter-term bonds pay a higher interest rate than longer-term bonds. Yet, that recession has not come.

The first quarter GDP is expected to show an economy still growing even as more clouds gather, and spring looks stormy.

Financial journalist Tom Hudson is chief content officer at WAMU public radio station in Washington, D.C.