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U.S. Economy: Cloudy With a Chance of Stagflation

This is a syndicated repost published with the permission of Statista | Infographics. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

Having proven surprisingly resilient in the face of the Fed’s aggressive tightening policy over the past year, the U.S. economy started to show signs of weakness in the first three months of 2023. Annualized real GDP growth slowed to 1.1 percent in Q1 2023, the Bureau of Economic Analysis said on Thursday, down from 2.6 percent in Q4 2022 and way below analyst expectations.

While that could have been good news for those hoping for the Fed to pause rate hikes at the upcoming FOMC meeting next week, the underwhelming growth reading was accompanied by an uptick in the price index for personal consumption expenditure (PCE), the Fed’s go-to inflation gauge. The PCE price index increased at an annual rate of 4.2 percent in Q1 2023, up from 3.7 percent in the previous quarter. The core PCE index, excluding food and energy, increased 4.9 percent, up from 4.4 percent in Q4 2022.

Slowing growth is generally accepted as a necessary evil to bring down inflation. Slow growth combined with stubborn or even rising inflation is another story altogether, however, as it evokes fears of stagflation, the worst of both worlds. Stagflation, a period of slow growth, high unemployment and high inflation, is widely considered one of the worst conditions for an economy to be in, as it limits the instruments available to policy makers. Measures that fight slow growth and unemployment tend to fan inflation, while measures taken to cool inflation stifle economic activity and ultimately lead to unemployment.

While that scenario is still far off, after all, the economy still grew in Q1 2023 and unemployment remains historically low, the latest readings will likely strengthen the Fed’s conviction to bring down inflation at (almost) all costs. As the turmoil in the banking system seems to have calmed down for now, many are expecting another modest, i.e. 25 basis point hike from the FOMC next week.

This chart shows the quarterly change in real GDP and the price index for personal consumption expenditure in the U.S.

Quarterly real GDP growth and PCE inflation

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