The American economy grew by 2.2% (annualized) in the first quarter according to the BEA’s second estimate. That was a tick lower than the advanced estimate, but right in line with what we were expecting.
Consumer spending remained soft at 1.0% annualized (down from 1.1% in the advanced estimate). Recall that the first quarter pause in spending came after a very healthy Q4, where spending grew by 4% driven by post-hurricane related re-stocking activity.
On a more positive note, business investment was revised up from 7.3% to 9.2%. Investment in structures led the way, up 14.2% (from 12.3% in the advanced estimate). Spending on equipment was also revised up to 5.5% (from 4.7%), as were outlays on intellectual property, which jumped 10.9% annualized (from +3.6%in the advanced release).
Residential investment was revised down in Q1, to a 2% decline, after initially being reported as flat. For perspective, that came after a 12.8% surge in Q4.
Partially offsetting the upward boost from business investment were smaller positive contributions from inventory building (+0.1%-pts versus 0.4%-pts) and net exports. A slight downward revision to exports and upward revision to imports meant trade added 0.1 percentage points to growth rather than 0.2 in the advanced estimate.
Key Implications
All in, these were rather uneventful revisions. Upward revisions to business spending were offset by lower contributions from trade and inventories, with very slightly weaker consumer spending tipping overall GDP growth down a tick. A slight downward revision to growth in the first quarter does not change the story for the economy, which involves residual seasonality holding back growth in Q1, but then likely to see quarterly growth of close to 3% through the remainder of the year. Abstracting from quarterly volatility the U.S. economy grew at 2.8% on a year-on-year basis in the first quarter – well above it’s potential, and a marked acceleration from 2% at the beginning of last year. There is little debate that the US economy has been doing very well.
The Fed has already discounted the somewhat slow start to the year. There is nothing in today’s revision to alter their view. Barring some dramatic unforeseen event, it’s all systems go for a rate hike in two weeks’ time. Beyond June, we expect the Fed to raise rates once more this year. Given the recent improvement in inflation there is upside risk to that view, but it is being tempered by continued plans to impose import tariffs. These have negative consequences for business confidence and our outlook for investment.
