Kiplinger's GDP Outlook: The Economy is Slowing Again

There’s a 50% chance of a recession in the second half of 2023.

Illustration of economic growth
(Image credit: Getty Images)

Kiplinger's Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or for more information.

The economy is slowing again. First-quarter GDP grew only 1.1%, as strong consumer spending on vehicles was canceled out by businesses not replacing inventory rundowns with new production. Exports and housing were also weak, so almost all the net growth came from government spending.

The modest first quarter may be the high point of the year. While consumers have been willing to spend, that may not continue, as their expectations of future economic conditions have been weakening. Business spending has already pulled back, and businesses are likely to conserve cash for the rest of the year, at least. Export markets are not likely to improve much this year. Government spending will continue, but no major new spending programs are on the horizon. In fact, any resolution of the debt limit issue could reduce federal spending.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

The unknowns right now are mostly negative. The banking system should be fine, but hidden land mines could be lurking — for instance, with troubled First Republic Bank’s (FRC) finances. The banking system as a whole is likely to be reluctant to press its luck with much additional lending and appears to be in the process of tightening lending standards because of the many economic uncertainties.

The Federal Reserve is still determined to raise interest rates to combat inflation, which could tip the economy into a mild and short recession. The Fed is likely to raise rates by another quarter of a percentage point at its next meeting on May 3. It may pause its rate hikes after that, but the hit to the economy from that rate increase and previous hikes will continue. We may still dodge a recession, but likely just barely.

Every cloud has a silver lining: The slowing economy will reduce inflation, and take the edge off the labor crunch and new-car order backlogs, perhaps allowing supply to catch up with demand. If inflation does come down as expected, then the Fed might be willing to actually cut interest rates next year.

Source: Department of Commerce: GDP Data (opens in new tab)

More from The Kiplinger Letter

David Payne
Staff Economist, The Kiplinger Letter

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.