US Economy Slows Against Mounting HeadwindsUSEconomySlowsAgainstMountingHeadwinds

US economic growth decelerated in the first quarter against mounting headwinds, as banking stress, stubborn price pressures and rising interest rates fan fears that a recession remains on the horizon. The nation’s GDP expanded at an annualized rate of 1.1%, slower than the 2.6% pace set in the fourth quarter last year. Strength in the services sector has powered growth, mitigating the impact of a five-month contraction in manufacturing activity. While aircraft spending boosted demand for durable goods in March, a gauge for business investment fell more than expected. In the services sector, businesses such as restaurants and hotels continue to recover from the pandemic, and sales of new homes hit a one-year high in March, indicating some resilience in the housing market. On the inflation front, fresh data on personal consumption expenditures (PCE) will be published on Friday. Economists predict that the core PCE price index—the Federal Reserve’s preferred measure of inflation—rose 4.5% year-over-year in March, compared with 4.6% the month before.

The Fed, which meets next week, faces a difficult road ahead in its battle against inflation amid fears that the economy and financial system are becoming increasingly fragile. News that First Republic suffered a larger outflow of deposits than expected during the first quarter reignited concerns surrounding the banking sector this week. Still, interest rate futures were betting on a quarter-point hike, followed by a June pause. Like the Fed, investors are facing a host of challenges that look far different than what they confronted over the past decade. In the first in a three-part series of investment ideas, PGIM affiliates provide a window into the range of opportunities that await agile investors, despite the uncertainty casting a shadow over the market outlook.