• Real Gross Domestic Product (GDP) increased at a seasonally adjusted annual rate of 1.1% in the first quarter of 2023. Real GDP increased 2.6% in the fourth quarter of 2022.
• Residential fixed investment decreased by 4.2% from the preceding quarter as new single-family construction and brokers’ commissions continued to decline.
• Final sales to private domestic purchasers rose 2.9% in the first quarter, highlighting consumer strength.
• Consumer spending will likely slow in coming months as wage growth moderates, easing price pressures and pulling down mortgage rates.

Gross private domestic investment fell at a seasonally adjusted annual rate of 12.5%, dragging down growth in the first quarter. Residential investment — a measure of economic activity in the sector — continued a long streak of declines. However, U.S. consumers are showing signs of resilience.

Real estate spending slowed once again

Residential fixed investment fell in the year’s first three months by 4.2% from the last quarter of 2022. This consists of purchases of private residential structures, new construction, improvements to housing units, brokers’ commissions on the sale of residential property and residential equipment. It was the eighth consecutive quarterly decline for the series.

Higher mortgage rates — currently sitting around 6.7% — have caused both buyers and sellers to pull back from the market. Higher interest rates have limited what buyers can afford and declining demand has caused builders to pull back.

Headline numbers hide consumer strength

Real GDP increased 1.1% in the first quarter from the preceding three months. And business investment grew by a tepid 0.7%. 

While these topline numbers aren’t all that impressive, final sales to private domestic purchasers – a sign of consumer strength – rose 2.9%. In the first quarter of 2022, that number was just 2.1%. Americans kept spending, despite many months of strong inflation. 

What’s ahead for the U.S. economy

Historically, declining new construction and slumping residential investment have each acted as early-warning indicators of an economic downturn. However, an increase in employee compensation in the first quarter has fueled consumer spending, buoying the economy as a result.

That said, a cooling labor market and moderating wage growth, coupled with higher interest rates and tighter credit conditions, will likely cause consumer spending to ease in the coming months. Declines in consumer spending should also cause inflation to fall at a more rapid pace.  This will lower long-term yields, including that of the 10-year Treasury, which mortgage rates tend to follow closely.