Weekly Market Update: May 8, 2023
The nation’s gross domestic product (GDP) expanded by an annualized rate of 1.1% in the first quarter. That estimated figure was well short of the consensus forecast of around 2% and a sign that economic growth is slowing. A strong contribution from the consumer sector and an increase in exports was partially offset by a retreat in manufacturing activity and a notable drop in fixed residential investment.
Manufacturing activity continues to contract. The Institute for Supply Management, a trade group, reported that manufacturing activity in April was at 47.1%. (A reading of 50% is the dividing line between a contracting and expanding sector.) This marked the sixth-consecutive contraction in manufacturing activity. It also is worth noting that the ISM’s measure of prices in the manufacturing sector came in at 53.2%, four percentage points above the March reading and the highest level since June, 2022.
Inflation remains sticky. The core Personal Consumption Expenditures (PCE) Price Index, which excludes the more volatile food and energy components, rose 4.6% during the 12-month period ended March 31st. That figure was slightly higher than the consensus estimate and well above the Fed’s price growth target rate of 2%. The PCE measure, which is closely monitored by the central bank for signs of inflation, followed a stronger-than-expected March core Consumer Price Index reading of 5.6%.
Meantime, first-quarter earnings season has been better than Wall Street envisioned. As of the halfway mark, more than 75% of the reporting S&P 500 companies had exceeded reduced estimates. Overall, profits are now forecasted to have declined 3%-4%, a narrower drop than the previous estimate, but it would still represent the second-straight quarterly profit decline. The weaker profit growth, along with a drop in the leading economic indicators and the continued inversion of the Treasury market yield curve, suggests at least a mild recession lies ahead, even with the resilient labor market and consumer sector.
Conclusion: The first-quarter earnings results have provided support for equities. Still, there are many headwinds in place—including stubbornly high inflation, slowing economic growth, banking system concerns, and a looming debt ceiling battle on Capitol Hill—that may lead to uneven near-term performances for the stock and bond markets. Thus, we think a measure of caution is warranted.