First Quarter Real GDP Revised Higher While Consumer Sentiment Holds at a High Level
Revisions to first-quarter real GDP show the economy expanded at a 1.2 percent annual rate compared to the initial estimate of 0.7 percent. The major contributors to the upward revision were consumer spending, business investment, and government spending.
Real consumer spending was revised up to a 0.6 percent annual growth rate, boosting its contribution to overall GDP growth from 0.2 percentage points to 0.4 percentage points. The areas with the largest upward revisions were spending on motor vehicles and parts, other durable goods, housing and utilities, and food services and accommodations.
Within business investment, the largest upward revisions came from spending on structures, which was revised up to a 28.4 percent growth rate from an initial estimate of 22.1 percent. The upward revision boosted business investment’s contribution to real GDP growth to 0.69 percentage points from 0.55 percentage points. Intellectual property was revised up to a 6.7 percent growth rate from a 2.0 percent pace, boosting its contribution to real GDP growth to 0.27 percentage points.
Finally, government expenditures were revised higher primarily because of upward revisions at the state and local level. Spending by state and local governments fell at a −0.6 percent rate compared to the prior estimate of a −1.6 percent pace.
The key measure of private domestic demand, real final sales to private domestic purchasers, was revised up to a 2.7 percent annual pace from the initial estimate of 2.2 percent. That revision pushed the year-over-year gain to 2.9 percent, a respectable pace by historical measures, just slightly below the 45-year annualized rate of 3.0 percent.
The University of Michigan’s Index of Consumer Sentiment posted a final May value of 97.1, nearly unchanged from the April level of 97.0. The final May figure was down slightly from the preliminary estimate of 97.7 released in the middle of the month. Consumer sentiment continues at a high level, about 10 points higher than the average index level of 87.6 since 1985.
Among the two major components, the current economic-conditions index ended May at 111.7, down from 112.7, while the consumer-expectations index, one of the AIER Leaders, came in at 87.7, up from 87.0 in April. The Michigan consumer-expectations index has been a positive contributor to the performance of the AIER Leaders index for several months. The latest update is likely to show that it continues to make that contribution.
Durable-goods orders for April fell 0.7 percent for the month on broad weakness across most industries. The tally for core capital-goods orders, nondefense capital goods excluding aircraft, came in flat for the second month in a row. This measure is considered a good proxy for business investment and has been on an improving trend in recent months. Stronger economic conditions, rising labor costs, and rising corporate profits should provide a solid foundation for further gains in core capital-goods spending in the second half of 2017.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
