US economic growth slowed sharply in the first quarter of the year, despite strong consumer spending resilient to interest-rate rises designed to tame historic inflation.
The latest GDP figures released by the US commerce department show that the world’s largest economy slowed sharply from January through March, to just a 1.1% annual pace as businesses reduced inventories amid a decline in housing investment. The abrupt deceleration from 2.6% growth in the final three months of 2022 and 3.2% from July to September came in significantly under economists’ expectations of a 2% increase.
The figures indicate that aggressive interest rises designed to tame inflation are beginning to produce what US central bankers desired – a slowing economy coupled with reduced wage increases and a tighter job market without tipping it into outright recession.
“The data confirm the message from other indicators that while economic growth is slowing, it isn’t yet collapsing,” said Andrew Hunter, chief US economist at Capital Economics. “Nevertheless, with most leading indicators of recession still flashing red and the drag from tighter credit conditions still to feed through, we expect a more marked weakening soon.”
Resiliency in consumer spending, which rose 3.7%, reflected gains in goods and services and came as business investment in equipment recorded the biggest drop since the start of the pandemic in 2020 and inventories dropped the most in two years.
The Federal Reserve has indicated that while it has slowed the rate of interest rises, it expects commercial lenders, buffeted by the collapse of two regional banks this year, to tighten lending standards.
Many economists say the cumulative impact of Fed rate hikes and tighter lending requirements have yet to work their way through the system, presenting central bankers with a dilemma over whether to continue raising rates.
“The last thing the Federal Reserve wants to be doing is raising rates as the economy begins to grind to a halt and potentially exacerbating the situation,” said Marcus Brookes, chief investment officer at Quilter Investors. “The coveted soft landing is looking increasingly difficult to achieve and we are now getting towards a position where the market may become concerned that stagflation could be a likely possibility.”
There is widespread skepticism that the Fed will succeed in averting a recession. An economic model used by the Conference Board, a business research group, puts the probability of a US recession over the next year at 99%. That expectation is compounded by political risk, given congressional Republicans could let the US default on its debts by refusing to raise the statutory limit on what it can borrow. Wider global economic conditions are also in play.
Earlier this month, the International Monetary Fund downgraded its forecast for worldwide economic growth, citing rising interest rates around the world, financial uncertainty and chronic inflation.
The IMF chief, Kristalina Georgieva, said global growth would remain about 3% over the next five years: its lowest such forecast since 1990.

In Financials, our banking tranche showed negative returns through the quarter and detracted significantly from performance in our global and US funds. Only one of the twelve banks we held at various points through the quarter contributed positively to performance, and First Republic Bank (FRC US)2 was the largest detractor.
Our very selective approach to investing in Banks led us to own First Republic at portfolio
weights that expressed a high degree of conviction in the company’s risk-adjusted return profile. As you are likely aware, over the past month, First Republic experienced a significant crisis, as collateral damage from the Silicon Valley Bank (SIVB US) collapse, which resulted in a severe de-rating of the FRC share price. A fair question for anyone to ask is how to reconcile our very selective approach to investing in banks with a large position in a bank that has experienced a significant crisis. At a very high level, our investment thesis on First Republic was based in its application of a world-class client service model to arguably the world’s most attractive banking client markets (specifically, the high net worth and high-end professional services markets in urban coastal population centers across the United States). That strategy for First Republic had enabled the company to structurally grow earnings while preserving exceptionally conservative underwriting standards. In other words, while First Republic is a bank, we observed that its unique model and exposure profile largely neutralized most of the quality attributes that generally make banks less attractive and more risky. Put another way, an attribute-by-attribute analysis of First Republic, reinforced over its long successful track record, made us comfortable treating First Republic as we would treat best-in-class growth companies we discover in other industries.
However, after SVB Financial shared its post-close announcement on Wednesday, March 8th, highlighting elevated deposit attrition, the sale of available-for-sale securities at a material loss, and an equity capital raise, we spoke with First Republic’s CFO in order to confirm our knowledge of the company’s exposure to deposits from early-stage companies, net unrealized losses in available-for-sale securities, and other aspects of its capacity to avoid the negative feedback loop that SVB was beginning to experience. We left that balance sheet review confident enough to continue holding our positions. What destabilized our confidence was Friday’s announcement that SVB Financial would enter receivership and the recoverability of uninsured deposit balances at SVB was in question. As these revelations became clear, we concluded that the probability of contagion extending to First Republic depositors had become too high to justify continuing to hold our positions. In other words, we concluded that First Republic had ceased to be an investment opportunity and had instead transitioned to more of a pure gamble on which wagering our clients’ funds was unacceptable. We proceeded to exit our entire investment position in First Republic at the next opportunity (the Monday morning pre-market) as efficiently as we could without further pressuring the share price.
In the aftermath (at least the first stage) of this banking crisis, we have carefully reviewed our financial sector investment strategy. We have reinforced our commitment to finding and owning best-in-class growth companies in the capital markets ecosystem. Perhaps more importantly, we have further tightened our already strict standards for bank and real estate company investments. This specifically means that we will invest in fewer banks going forward. They are far too fragile to take large portfolio positions in. Those bank investments that we do own will be more tactical or opportunistic, and they will be held at even more limited portfolio weights. We are also currently focused on the negative implications from this banking crisis related to funding, credit, and regulatory costs for American banks generally. We are focused on the extent to which those issues could apply material stress to more cycle-sensitive borrowers. We are now even further underweight American banks than we were prior to the banking crisis, beyond simply exiting our First Republic position. Our real estate company investments remain focused on structural growth opportunities that exclude exposure to general commercial real estate classes. And we have increased our exposure to multiple best-in-class growth companies within the capital markets ecosystem whose upside scenarios we believe have become significantly more likely due to this banking crisis.
2 As of 01/31/2023, the Grandeur Peak Funds owned 221,572 shares of First Republic Bank and 47,006 shares of SVB Financial Group

If anybody has money making suggestions (other than cash) pass them along

Lucas: Customer service complaints have always been sort of a feature of Vanguard’s history. If you go back to the days when Bogle led the firm—this is a point that I made at that conference—there were lots of complaints over the years about Vanguard’s customer service. I like to compare Vanguard to, say, those of you who shop at Aldi. If you go to Aldi, you have your quarter, you get your grocery cart, you bring your own bags or you put it in boxes. I would say Vanguard has got more customer service ethos than that, but it is something where it’s not necessarily been known for high-touch customer service. And it is trying to become a leader in customer service and to really improve its technological offer.
So, what Vanguard is trying to do is, because it has experienced over the course of its history and continues even in this first quarter, experienced such asset growth, it’s trying to enable investors to do as much as they can as simply as they can online, so without talking to a human advisor. And they’ve really made investments in technology. They’ve modernized their technology platform, and they’ve seen increased resiliency and increased customer service scores.
The big snafu they made in 2020 was—this is Vanguard, they’re always thinking about investor assets and costs and trying to save money on behalf of investors—so, in 2020, when the market turned down, they stepped back and they looked and they saw that historically when the market falls, client communications sort of fall off a cliff. So, they actually slowed their hiring of customer service representatives right at a time when—in fact, what happened with the lowering of interest rates is that investor demand shot up and that caused, I think, significant wait times and lots of frustration. They have normalized that, and I think are committed to sort of being a little bit more, call it, I don’t know if cautious is the right word, but they’re going to be more prone to overspend and I think on what they expect they will need to try and improve customer service. In talking with Vanguard leadership, they feel like they’ve heard that and they’re trying to become known for best-in-class customer service. That is a goal of theirs, and they say they’ve made progress in that. It remains to be seen. We hear a lot of comments from that here at Morningstar. But the big thing always to keep in mind is that Vanguard serves a lot of customers. So, you’d expect that some of them would be frustrated. And I’ve heard both success stories and stories of frustration, and we’ll see if the stories of frustration are minimized over the coming years.

Oh boy, we flew on Southwest 737 last summer. They switched from the long time stable DC-10 to this new plane.