The Higgins Report: GDP Dip Signals Recession

Yet consumer spending and employment remained strong

By Joe Higgins, Quest 4 Quality

The odds of a recession have risen since January and will peak in the second half of this year as corporations and consumers cut back on spending. Here’s the lowdown:

Gross domestic product (GDP) in the first quarter of this year came in at 1.1%. The number was well below Wall Street’s expectations of 1.9% growth, and significantly below 2022’s Q4 GDP of 2.6%.

The figures point to a disturbing trendline in what appears to be a slowly declining economy when looked at in the aggregate. It would seem that the effort by the Fed to slow the economy with a full year’s worth of interest rate increases is finally starting to affect overall growth. 

GDP is the final arbiter of whether we are headed for recession or recovery. Since March 2022, our economy proved to be productive, diverse and resilient. It has resisted nine rate hikes in the past 12 months, and consumer spending has remained strong. The unemployment rate is near a 50-year low, and even consumer confidence has remained steady despite declining indicators pointing to a recession.

Last year our GDP growth was pushed along by businesses of all sizes that were building inventory after all the pandemic-period shortages. The start of 2023 and the GDP report out earlier this week by the Bureau of Economic Analysis (BEA) have shown a remarkable decline in inventory growth. The Federal Reserve estimated that this slowdown in inventory acquisition in Q1 reduced our overall GDP by 1.9%.

It is now the opinion of economists, big banks and Wall Street that this report points to further GDP declines in Q2 and Q3, which could signal a recession. 

The weight of inflation and the Fed’s slow response to it, the current crisis in the banking industry and the war in Ukraine will finally move the economy towards slower growth. The negative trend in manufacturing, lending and an increase in credit card debt all portend a possible recession. A majority of analysts are now predicting a slowdown to begin in Q3 of this year, with the Atlanta Fed’s GDPNow numbers showing GDP growth at a negative 0.3% for the next quarter. 

On the positive side, we have seen recent strength in the stock market, job gains have been solid and the Consumer Confidence Index is still above 100. By comparison, the confidence index fell to 34.6 at the start of the 2008 recession.

The good news for BrandSource members and everyone in the home goods industry is consumer spending, which represents 72% of GDP and was up 2.5% in the first quarter. January sales in particular were outstanding, with the retail, auto and even housing sectors all showing gains for the month. The BEA reported strong governmental spending by local and federal agencies, which helped push GDP into positive territory in Q1.

Manufacturing, however, has remained in recession, with the Purchasing Managers’ Index (PMI) below 50 for eight months. Mortgage rates hovering near 7% have put the housing industry in a dour position for the foreseeable future because today’s consumers shut down when rates go above 5.5%. Pending home sales have been down every month since March 2022, with an average decline of over 20%.

The Bottom Line

Last quarter’s 1.1% increase in GDP will likely make it the best and maybe the only positive quarter in 2023. Banking solvency issues, lenders tightening borrowing and higher costs for shoppers will finally slow down the main driver of the economy, namely consumer spending. 

Mind you, the economy remains structurally sound; it is nothing like the 2008 quagmire, and if we do descend into a recession due to the war in Ukraine, the Federal Reserve’s rapid increase in interest rates and the perception that our banking system has failed, it should be over in two quarters.

Given the strength in consumer spending and low unemployment numbers, Fed Chair Jerome Powell could still drive down inflation and pull off his so-called soft landing, which means we avoid a recession.

Unfortunately, the Fed does not have a good track record of making that happen.  

Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at

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