First-Quarter Real GDP Revised Higher
Revised data from the Bureau of Economic Analysis show the U.S. economy grew at a 1.4 percent annualized pace in the first quarter. That estimate compares to a 1.2 percent estimate last month and an original estimate of 0.7 percent released in April.
The largest contributors to the upward revision were personal consumption expenditures and net trade. PCE was revised up to a 1.1 percent growth rate from the prior estimate of 0.6 percent. The primary sources of the faster growth in PCE were medical-care services and financial services. PCE growth added 0.8 percentage points to real GDP, compared to 0.5 percentage points in the prior estimate.
Within net trade, real exports were revised up to a 7.0 percent growth rate from a prior estimate of 5.8 percent. The faster growth helped boost the estimated contribution to GDP growth to 0.8 percentage points from the prior estimate of 0.7 percentage points.
The largest downward revision was in nonresidential fixed investment in structure. Investment in structures rose at a 22.6 percent pace compared to a previous estimate of 28.4 percent growth. The downward revision cut 0.1 percentage points off total GDP growth.
On balance, the revisions to first-quarter real GDP don’t change the overall picture. Real private domestic demand rose at a 2.9 percent rate in the first quarter and is up 3.0 percent from the first quarter of 2016. That result is right in line with the 45-year annualized growth rate of 3.0 percent. That suggests that the private domestic economy is doing well. Weakness in overall GDP growth continues to come from slower-than-average export growth and government-expenditure growth. Both areas are well below their 45-year average growth rate. Exports have grown at an average pace of 5.4 percent over the long term compared to 3.4 percent over the past year while government expenditures have a 1.6 percent long-term growth rate compared to a 0.4 percent decline over the past year.
Price measures in the GDP report show consumer prices rose 2.0 percent from the first quarter of 2016, in line with the Federal Open Market Committee’s target. Excluding the volatile food and energy categories, core PCE prices rose 1.7 percent from a year ago, below the 2.0 percent Fed target. Price increases remain remarkably steady by historical measures, which allows the Fed to stay at a slow pace of normalizing monetary policy.
Corporate profits before tax as measured by the National Income and Product Accounts rose 3.3 percent from a year ago. On an after-tax basis, profits were up 4.1 percent versus a year ago. This measure of profits includes inventory-valuation adjustments and capital-consumption adjustments that are not part of standard private accounting measures. Excluding these adjustments (which makes the NIPA calculations more consistent with corporate accounting), pre-tax profits rose 8.9 percent from a year ago while after-tax profits posted a robust 11.5 percent jump. The strong rebound in after-tax profits is one reason equity prices have held up well despite the weak headline GDP numbers.
Current trends suggest the economy is likely to continue to expand at a moderate pace, potentially faster as the tight labor market supports consumer spending. Accelerating wages may increase pressure on business to increase capital spending to boost productivity and restrain unit-labor cost pressures. Additionally, some softness in the dollar combined with somewhat better growth in foreign economies may help growth in exports.
On the negative side, the weaker dollar may put upward pressure on import prices. Potentially faster price increases combined with the slow pace at which the Fed normalizes policy may put upward pressure on nominal interest rates and restrain activity in interest-rate-sensitive parts of the economy.
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.
