According to the second estimate of real GDP, first quarter growth declined by 1.5% quarter-over-quarter (q/q, annualized). This was a slight downgrade from the -1.4% suggested in the advance estimate released last month. The reading came in slightly below the consensus forecast which called for a decline of 1.3%.
Consumer spending rose by 3.1%, up from the 2.7% suggested in the advance estimated. Spending on services (4.8%) were higher, while goods expenditures were flat in the first quarter. In terms of the composition of goods spending, gains in durables (6.8%) were completely offset by a pullback in non-durables (-3.7%). Revisions were positive for both services (previously reported at 4.4%) and durable expenditures (previously reported at 4.1%), while non-durables (previously reported at -2.5%) were revised lower.
Business investment rose 9.2%, unchanged from the advance estimate. Capital expenditures on equipment (13.2%) and intellectual property products (11.6%) accounted for all the gains, while investment in structures (-3.6%) continued to slide – now recording declines in each of the last four quarters. Revisions added to the gains in intellectual property products, while equipment and structures were both revised lower.
Residential investment was up a modest 0.4%, lower than what was previously reported at 2.1%.
Government spending (-2.7%) fell for the second consecutive quarter, as spending at both the federal (-6.1%) and state & local (-0.6%) levels were lower. In terms of federal spending, both defense (-8.5%) and non-defense (-2.6%) recorded declines last quarter.
Imports surged by 18.3% – up from the 17.7% previously reported. Gains were primarily concentrated in goods (20.9%), though imports of services (5.4%) were also higher. Meanwhile, exports fell by 5.4% as gains in service exports (3.6%) were more than offset by a pullback in the export of goods (-8.9%). This led to a significant widening in the trade deficit, resulting in net trade subtracting 3.2 percentage points (pp) from headline growth – unchanged from what was suggested in the advance estimate.
Inventory investment was revised lower, now subtracting 1.1pp (previously -0.8pp) from headline growth.
Key Implications
The second estimate of first quarter growth did nothing to remove the tarnish suggested by the advanced estimate released last month. Even after including a more complete source of data than are available at the time the first estimate was made, growth still registered a decline through the first three months of 2022. However, the details continue to show that underlying demand was far stronger than the headline suggests. Domestic demand rose by a healthy 2.7%, while the combination of weaker inventory investment and a widening trade deficit shaved 4.3 percentage points from headline growth.
While growth is expected to rebound above 2% in the second quarter, we do anticipate some cooling in demand in the latter half of the year. The combined effects of higher interest rates and eroding purchasing power emanating from the persistent inflationary pressures will start to exert a more meaningful drag on both consumer spending and business investment, pushing growth to a sub-trend pace towards year-end and into 2023. This will help to ease demand-side pressures in the economy, allowing inflation to move back towards the Fed’s 2% target.
