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The economy showed resilience in April, with consumer spending higher than expected. But it is still slowing. The April rise in consumer spending was modest and mostly driven by motor vehicle sales. The April increase in disposable income, adjusted for inflation, was the smallest in almost a year. Business spending rose decently in April, but it has been on a trend of slowing growth. Exports dropped as countries like Germany move into recession.
Second-quarter GDP growth is likely to be around 2.0%. While higher than the first quarter’s 1.3%, it is likely to be the high point of the year, as solid consumer spending on vehicles gets canceled out by lower business spending. Exports and housing will continue to be weak, so what growth there is will likely come from government spending.
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The odds of a recession in the next 12 months are still 50%. Consumer expectations of future economic conditions are still poor. Businesses are likely to conserve cash and limit their spending for the rest of the year. Export markets figure to weaken. Government spending will continue, but no major new spending programs are on the horizon. In fact, any resolution of the debt limit issue could reduce federal spending, though likely by only a modest amount.
The banking system should be fine, but banks are going to be reluctant to press their luck with much additional lending. Rather, they appear to be in the process of tightening lending standards because of the many economic uncertainties.
The Federal Reserve may elect to pause its interest rate hikes at its meeting on June 14, but it is still determined to combat inflation. Inflation has been slower to come down than hoped. It’s definitely on a downtrend, but if it’s too stubborn, the Fed will feel the need to raise rates again.
Every cloud has a silver lining: The slowing economy will gradually reduce inflation, and take the edge off the labor crunch and new-car order backlogs, perhaps allowing supply to catch up with demand. If inflation does come down as expected, then the Fed might be willing to actually cut interest rates next year.
Source: Department of Commerce: GDP Data
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