Economic Watch: GDP Growth Slows in Q1

Executive Summary

• U.S. GDP increased by 1.1% annualized in Q1 2023, below consensus expectations of 2%. Weakness in the residential sector, reduced inventories and less business investment are evidence that the economy is losing momentum as the Federal Reserve intends.
• Consumer spending, government spending, exports and nonresidential investment were the main growth drivers.
• Today’s GDP report also indicated that core inflation in Q1 was higher than expected. Persistently high inflation supports CBRE’s view that the Fed will hike interest rates by 25 basis points (bps) in May to a range of 5.00% to 5.25%. After May, we expect the Fed will hold interest rates steady before beginning to cut them in Q4.
• CBRE expects a moderate recession will take hold later this year due to higher interest rates and tighter credit conditions.
• Capital markets activity is expected to remain subdued over the next several months before beginning to recover late in the year. We expect leasing activity to remain weak for most of the year.

Q1 2023 GDP

U.S. GDP grew by 1.1% on an annualized basis in Q1, below consensus expectations of 2%. Personal consumption rose 3.7% despite high inflation and rising interest rates. Today’s GDP report showed that inflation during Q1 remained higher than expected with a 4.2% annualized increase in the Personal Consumption Expenditures (PCE) Price Index, which is the Fed’s preferred measure of inflation. Core PCE, which excludes food and energy, rose by 4.9% annualized during the quarter.

Private investment fell by 12.5% in Q1 as higher interest rates weighed on the broader economy. Inventories also fell because of higher interest rates and economic uncertainty. Overall, there are pockets of strength in the economy (notably the consumer), but higher interest rates are taking a toll on business and residential investment.

CBRE Forecast

Although the economy is slowing, persistently high inflation likely will cause the Fed to increase interest rates by 25 bps in May. We expect the economy will soon enter a moderate recession that will push the unemployment rate up to 4.1% from 3.5% by year-end. CBRE expects Core PCE will fall to 4.0% by year-end.

Elevated interest rates, tighter credit conditions and economic weakness will limit commercial real estate activity. We expect capital markets activity to remain subdued over the next several months. Leasing activity will also remain weak for the rest of the year.

Figure 1: CBRE House View