U.S. GDP Revised Up to 2.1% in Q1, But Underlying Details Show Weaker Mix

The U.S. economy expanded at a 2.1% annual rate in the first quarter, a notable upward revision from the prior estimate of 1.6% and surpassing the consensus forecast. This improved headline figure, however, masks a more complex underlying picture, with some key components signaling a deceleration in economic momentum. Upward adjustments to net exports, inventories, and business investment were the primary drivers of the overall increase, counteracting downward revisions in personal consumption and residential construction.

Delving into the specifics, the strong headline growth largely stemmed from a significant upward revision in net exports, coupled with minor positive adjustments to inventories and business investment. These gains were sufficient to offset a substantial downward revision in personal consumption for services. For a clearer understanding of sustainable economic expansion, economists often focus on "core" GDP, which encompasses consumer spending, business fixed investment, and home building, while excluding more volatile elements such as government outlays, inventory changes, and trade. In the first quarter, core GDP advanced at a 1.7% annual rate, a decrease from the previous estimate of 2.4% and representing the slowest growth rate for this category since 2022.

A significant development within the report was the considerable downward revision to personal consumption, which is now estimated to have grown at a 0.5% annual rate, down from the prior estimate of 1.4%. This marks the slowest growth rate for this critical component in four years and could indicate that consumers are facing increasing challenges in sustaining their spending habits. In contrast, business investment, propelled by ongoing data center and equipment buildouts for artificial intelligence, exhibited robust growth. This category was revised upward to a 10.6% annual rate, making the largest contribution to Q1 real GDP and accelerating significantly from the 2.4% pace observed in the previous quarter. Excluding components directly linked to AI investment—equipment and intellectual property—Real GDP expanded at a more modest 0.3% annual rate in the first quarter.

Corporate profits also showed strength, with a second look at Q1 data revealing a 1.7% gain from the fourth quarter, an improvement from the earlier estimate of +0.9%, and a solid 12.8% increase year-over-year. Real Gross Domestic Income (GDI), an alternative measure of economic output that tends to align with GDP over time, rose at a 1.2% rate in the first quarter and was up 2.2% from a year ago. The GDP price index, a measure of inflation, was revised higher to a 3.6% annual rate from a prior estimate of 3.5%, with a 3.3% increase compared to a year prior. Nominal GDP, which combines real GDP growth and inflation, saw an upward revision to a 5.8% annualized rate in Q1 from a prior estimate of 5.2%, and was up 6.1% from a year ago. Both figures exceed the current short-term interest rate target of 3.625%. Analysts anticipate that price pressures will moderate in the latter half of the year, as the recent decline in energy prices following the U.S.-Iran peace agreement begins to influence inflation data.

Key terms:

1. Real GDP: Gross Domestic Product adjusted for inflation, reflecting the actual volume of goods and services produced.

2. Nominal GDP: Gross Domestic Product measured at current prices, without accounting for inflation.

3. Core GDP: A customized measure of economic growth that excludes volatile components like government spending, inventories, and trade to better gauge sustainable economic momentum.