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Second reading revises Q1 growth down on steeper investment slowdown and smaller inventory build-up

Economic growth in the first quarter was slightly lower than previously reported, according to a second GDP estimate released by the Bureau of Economic Analysis (BEA). The economy expanded 3.1% over the previous quarter in seasonally-adjusted annualized terms (SAAR), which was down from 3.2% in the first estimate, but was still sizably higher than Q4’s 2.2% and exceeded market expectations of a 3.0% expansion. The downward revision came largely on the back of lower-than-previously-estimated growth in fixed investment, as well as a smaller increase in firms’ inventories. On the other hand, the slowdown in private consumption was slightly milder than in the first reading, while both exports and imports were revised substantially upwards. In year-on-year terms, growth was unchanged at 3.2%, up from 3.0% in Q4.

Overall, the economic picture was little changed in this second GDP reading, as growth was still carried by net exports and inventories, two volatile components, while private consumption and fixed investment—the country’s core growth engines—slowed markedly. Export growth was notably revised up to 4.8% (previous estimate: +3.7% SAAR; Q4: +1.8% SAAR), while imports were also revised up from the 3.7% contraction previously seen to a softer 2.5% decline (Q4: +2.0% SAAR), leaving the net trade growth contribution unchanged at 1.0 percentage point (pp). Meanwhile, the downward revision to inventories shaved 0.1 pp off its growth contribution, now at 0.6 pp.

Turning to consumption growth, private spending edged up to 1.3% SAAR, from 1.2% in the previous estimate, but still down significantly from Q4’s 2.5%. This was mostly due to a smaller contraction in spending on goods compared to the first estimate. In addition, government consumption and investment growth also edged up to 2.5% in the second reading, up from 2.4% previously, due to an upward revision in state and local spending. According to the BEA, however, the government shutdown in January had a negative impact, estimated at around 0.3 percentage points of GDP, on both public and private spending in the quarter, which should be compensated by a rebound effect in Q2. Lastly, private fixed investment growth was even weaker in the quarter than previously seen, slowing to just 1.0% (previous estimate: +1.5% SAAR; Q4: +3.1% SAAR) as both residential and business investment were revised downward.

Regarding the outlook for growth in the second quarter and the implications for monetary policy, Leslie Preston, senior economist at TD Economics, commented that “the revisions to the growth side of the economy were fairly staid. The story of strong headline growth in the first quarter boosted by temporary factors remains intact. As the temporary factors reverse in Q2, growth is likely to slow below 2%.” However, she also remarked that “the bigger story is that inflation softness in Q1 was more pronounced than expected”. Indeed, core PCE inflation over the quarter, the Fed’s preferred gauge of underlying price pressures, was revised down from 1.3% (SAAR) in the first reading to just 1.0% in the second. According to Preston, upcoming inflation data for Q2 will thus be important as it will confirm “whether the inflation soft spot at the start of the year was indeed transitory, or if the Fed needs to more seriously consider the prospect of insurance rate cuts”.

The Federal Reserve expects economic growth of 2.1% in 2019 and 1.9% in 2020. FocusEconomics Consensus Forecast panelists expect GDP to expand 2.4% in 2019, unchanged from last month’s estimate. For 2020, the panel expects the economy to expand 1.7%.