U.S. GDP Growth Revised Up to 2.1% in Q1, But Consumer Spending Slows

Real Gross Domestic Product (GDP) in the United States saw an upward revision to a 2.1% annual growth rate in the first quarter, exceeding the consensus forecast of 1.6%. This adjustment largely stemmed from increased net exports, inventories, and business investment. However, these gains were partially offset by downward revisions in personal consumption and home building, suggesting a mixed economic picture beneath the headline figure.

Delving into the specifics, the stronger headline GDP growth masks a notable slowdown in consumer spending, a key driver of the U.S. economy. Personal consumption for services, in particular, experienced a significant downward revision, now estimated to have grown at a mere 0.5% annual rate. This marks the slowest growth for this category in four years and signals a potential deceleration in consumer activity. In contrast, business investment exhibited robust growth, accelerating to a 10.6% annual rate. This surge is largely attributed to the ongoing expansion in data centers and equipment for artificial intelligence, making it the largest contributor to Q1 real GDP growth.

To gauge the economy's underlying momentum, analysts often look to "core" GDP, which comprises consumer spending, business fixed investment, and home building, excluding more volatile components like government spending, inventories, and trade. Core GDP expanded at a 1.7% annual rate in the first quarter, a decline from the prior estimate of 2.4% and the slowest pace since 2022. While residential construction has been a persistent drag, the more impactful development was the significant downward revision to personal consumption, highlighting a potential vulnerability in the broader economic outlook.

Despite the mixed signals, corporate profits showed resilience, increasing by 1.7% from the fourth quarter and a robust 12.8% year-over-year. Similarly, Real Gross Domestic Income (GDI), an alternative measure of economic output, rose at a 1.2% rate in Q1 and is up 2.2% from a year ago. Looking ahead, the GDP price index, a measure of inflation, was revised upward to a 3.6% annual rate. Nominal GDP, which accounts for both real growth and inflation, grew at an annualized rate of 5.8% in Q1. While these figures remain elevated compared to current short-term interest rate targets, expectations are for price pressures to moderate in the latter half of the year, partly due to the recent decline in energy prices following the U.S.-Iran peace agreement.

Key terms

1. **Gross Domestic Product (GDP)**: The total monetary value of all finished goods and services produced within a country's borders in a specific time period.

2. **Personal Consumption**: The total spending by households on goods and services.

3. **Nominal GDP**: The total value of all goods and services produced in an economy, measured at current market prices, without adjusting for inflation.