United States: First-quarter GDP growth revised up on private spending and investment
May 26, 2017
Revised data showed that the economy grew at a faster clip than initially reported, with upward revisions to private consumption and business fixed investment spearheading the upgrade. GDP expanded at a seasonally-adjusted annualized rate (SAAR) of 1.2%, a marked revision from the 0.7% increase previously reported and well above market expectations of a milder revision to 0.8%. However, GDP growth was nowhere near the 2.1% expansion recorded in the last quarter of 2016. Although this provides a much needed upgrade to Q1’s headline figure, the reading still reflected overall economic weakness through the quarter despite buoyed survey-based data and a tightening labor market.
The second estimate’s gains were arguably centered where needed the most. Household spending growth, at first estimated to have expanded a very mediocre 0.3% in the first quarter, was effectively doubled to a 0.6% increase. Despite the upgrade, this was by no means a strong result—it represents the smallest rate of expansion since Q4 2009—and marked a very noticeable deceleration from the 3.5% rise seen in Q4. Nonetheless, several seasonal factors were at play in Q1, and our panelists expect private consumption to strengthen sharply in Q2 on a strong labor market and upbeat sentiment. Government consumption growth was also upgraded and thus pulled less on GDP in Q1.
Non-residential investment growth was also revised upwards from a 9.4% increase to an 11.4% expansion in Q1 (Q4: +0.9% SAAR). This marked the fastest rise since Q1 2012 and further highlighted breakneck growth in structures and equipment capital spending. With residential investment largely unchanged at 13.7% growth, the second estimate figure for overall fixed investment was upgraded from a 10.4% increase to an 11.9% expansion. This was the best result in five years and helped offset weak dynamics in inventory investment. In fact, the downswing in inventories was even larger than at first estimated and, according to revised data, it subtracted 1.1 percentage points from growth in Q1. In Q4, inventories had contributed 1.0 percentage point to growth.
Other than investment, the bright spot in Q1’s report was the dynamics observed in the external sector. Although no major revisions were made to either exports or imports, the first estimate had already highlighted the sector’s strong performance. On the back of a pickup in global demand and a more stable U.S. dollar compared to Q4, exports were confirmed at growth of 5.9%, a notable upswing from Q4’s 4.5% contraction. With imports unchanged at a weaker 3.8% increase (Q4: +8.9% SAAR), the net contribution of the external sector to overall growth swung from a negative 1.8 percentage points in the fourth quarter to a 0.1 percentage-point contribution in Q1.
The second estimate report suggests that slack in the economy was less than at first expected. In addition, the transitory nature of several of the headwinds that weighed on growth in Q1 point to a rebound in Q2, with our panel expecting growth to regain traction and come in at 2.8%. Nonetheless, hopes of a sharper rebound have been recently tempered by a string of soft data, including unexpected decreases in durable goods orders and shipments in April.
Author: David Ampudia, Economist