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PNC Chief Economist Gus Faucher: Upward Revision to Q1 GDP,

Michigan Business Network
June 2, 2023 11:00 AM

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Profits Down
  • Real GDP growth in the first quarter was revised slightly higher, to 1.3% from 1.1%.
  • Demand was strong in the first quarter, but inventories were a drag.
  • Corporate profits fell for a third straight quarter.
  • PNC expects a mild recession starting later this year.


Real GDP growth in the first quarter of 2023 was revised slightly higher in the second estimate, to 1.3% at an annual rate, from 1.1% in the advance estimate. There were upward revisions to investment in inventories, business fixed investment, consumer spending, and exports; these were partially offset by a downward revision to investment in housing.

Demand in the first quarter was strong, with real final sales of domestic product (GDP minus the change inventories) up 3.4%. In particular, consumer spending rose sharply, up 3.8% after adjusting for inflation, including a huge 16% increase in durable goods purchases as auto sales rose. But inventories were an enormous drag, subtracting more than 2 percentage points from growth in the quarter.

On a year-ago-basis real GDP growth was 1.8%, close to the economy’s long-run potential.

Corporate profits fell 5.1% in the first quarter of 2023 from the fourth quarter of 2022 (not annualized). Profits have now fallen for three straight quarters as businesses are finding it more difficult to pass along higher costs to their customers. Overall profits were down by $151 billion annualized in the first quarter, including a decline of $109 billion for nonfinancial domestic industries. Profits for domestic financial corporations fell by $25 billion, and profits from abroad fell by $16 billion.

The U.S. economy continues to expand in the first half of 2023, but growth is slowing as the drag from higher interest rates continues to accumulate. In particular, the housing market has already contracted significantly because of much higher mortgage rates. Falling corporate profits are a drag on business investment. Other weights on the US economy in the spring of 2023 are tighter credit and high inflation. But the labor market continues to hold up, supporting gains in consumer spending.

PNC expects a mild recession starting in the second half of 2023, with real GDP down less than 1% cumulative before the economy starts to recover in the first half of next year after the Federal Reserve begins cutting interest rates. Risks are weighted to the downside, however. In particular, a breach of the debt ceiling would drive borrowing costs much higher and make any recession more severe.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance, and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

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